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Sancho Panza

Italy's Renzi Must Bring Back The Lira To End Depression

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Telegraph 13/8/14

'Italy has been in depression for almost six years. The slump has been punctuated by false dawns, overwhelmed each time by the monetary amateurs in charge of EMU policy.

The latest recovery fizzled after a single quarter. The economy is in technical recession again. Output has collapsed by 9.1pc from the peak, back to levels last seen 14 years ago. Industrial production is down to 1980 levels.

It takes spectacular policy errors to bring about such an outcome in a modern economy. Italy did not suffer anything like this during the Great Depression, clocking up growth of 16pc between 1929 and 1939. But not even Mussolini was maniacal enough to pursue his Gold Standard delusions until the bitter end.

The Italian authorities discern flickers of recovery, like fortress guards in Dino Buzzati's Desert of the Tartars, deceived by optical illusions on the lifeless horizon. Bank loans to business are still falling at a rate of 4.5pc. Moody's says the economy will contract by 0.1pc this year. Societe Generale is pencilling in -0.2pc.

The property slump has not yet touched bottom. The Bank of Italy said the number of months needed to sell a house has risen to 9.4, from 8.8 late last year. The number reporting worsening market conditions has jumped from 19.6pc to 34.7pc in three months.

chart1new_3005542c.jpg

The lethal mix of economic contraction and zero inflation is causing Italy’s debt trajectory to spiral upwards, despite austerity and a primary surplus of 2pc of GDP.

Public debt jumped to 135.6pc in the first quarter from 130.2pc a year earlier. This is a mechanical effect, the result of a compound interest burden on a static nominal base. Real interest rates on Italy's €2.1 trillion stock of debt - with an average maturity of 6.3 years - is actually rising as deflation draws closer.

The debt ratio may test 140pc by the end of the year, uncharted waters for a country that effectively borrows in D-Marks. "Nobody knows when the markets will react,” said one Italian banker.

The recession is eroding tax revenues so badly that premier Matteo Renzi will have to come up with fresh cuts of €20bn to €25bn to meet EU deficit targets, perpetuating the vicious cycle.

The task is hopeless. A study by the Bruegel think-tank found that Italy must run a primary surplus of 5pc of GDP to stabilise the debt at 2pc inflation. This rises to 7.8pc at zero inflation. Any attempt to achieve this would lead to a self-defeating implosion of the Italian economy.

chart2new_3005544c.jpg

Ashoka Mody, until recently a top IMF bailout official in Europe, said the Fund's internal studies deemed it is impossible to run primary surpluses on the scale needed. He advises the Italian authorities to start consulting “smart sovereign debt attorneys to ensure orderly debt restructuring”.


Mr Scalfari seems to think Italy's democracy should be suspended to save the euro, that the country should double down on scorched earth policies, embarking on an even more draconian effort to regain competitiveness by means of an internal devaluation.

The young Mr Renzi - 17 years old when the Maastricht Treaty was signed, and therefore free from original sin - might equally conclude the opposite, that the euro should be jettisoned to save Italy.

It is an incontrovertible fact that Italy’s 14-year disaster coincides with EMU membership. This does not prove causality. It suggests that EMU set off a very destructive dynamic for Italy's particular circumstances, and is strong evidence that EMU now prevents the country from breaking out of the trap.




Mr Renzi is on his own. He faces an ECB that has fundamentally violated its contract with Italy, letting EMU-wide inflation fall to 0.4pc knowing that this causes the Italian crisis to metastasise. He faces an incoming Commission vowing to enforce the same disastrous policies that have already proved ruinous.

There is no point negotiating. These institutions have failed to ensure a symmetric adjustment that compels both North and South to take equal steps to close the intra-EMU divide from both ends, befitting their equal responsibility for mismanaging the EMU joint venture in its early years. By enforcing the will of creditors, they have run monetary union into the ground. They have no legitimacy left.

Italy must look after itself. It can recover only if it breaks free from the EMU trap, retakes control of its sovereign policy instruments and redominates its debts into lira, with capital controls until the dust settles.

Italy would not face an immediate funding crisis since it has a primary budget surplus. Its net international investment position is -32pc of GDP, compared with -92pc for Spain and -100pc for Portugal.

The country does not suffer from excess debt in any fundamental sense. Mortgage debt is very low. Aggregate debt is around 270pc of GDP, much lower than France, Britain, Spain, Japan, the US, Sweden or the Netherlands. The root problem is an exchange rate misalignment that creates an unnecessary public debt crisis through the perverse mechanisms of EMU.

There is no easy way to leave the euro. The interlocking structures of monetary union have gone much further than a fixed exchange peg. Vested interests are powerful and merciless. But it is not impossible either.'

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Italy would not face an immediate funding crisis since it has a primary budget surplus. Its net international investment position is -32pc of GDP, compared with -92pc for Spain and -100pc for Portugal.

The country does not suffer from excess debt in any fundamental sense. Mortgage debt is very low. Aggregate debt is around 270pc of GDP, much lower than France, Britain, Spain, Japan, the US, Sweden or the Netherlands. The root problem is an exchange rate misalignment that creates an unnecessary public debt crisis through the perverse mechanisms of EMU.

There is no easy way to leave the euro. The interlocking structures of monetary union have gone much further than a fixed exchange peg. Vested interests are powerful and merciless. But it is not impossible either.'

Remembering comments from younger people on an Italian house price story in 2012, unimpressed with 10%-20% off ponzi high prices, desperately wanting house prices to fall much much harder..... maybe they need a hpc and write loads of fresh mortgage debt. Fresh mortgage debt can be a solution. BoE now more concerned about low mortgage growth.

Don't let €1 houses for sale in Sicily fool you, when housing for workers so expensive. New Telegraph young woman journo isn't fooled either - same forces in play here.

Telegraph

Can you really buy a house for 80p?

As 20 houses in a Sicilian village go on sale for one euro each, we round up some of the cheapest houses to hit the market

By Helena Kealey

10:17AM BST 13 Aug 2014

We’ve all heard the great news. There isn’t a first-time buyer or home-hunter alive not despondently aware of the UK housing market recovery and the rise in property prices. Sigh. We’d throw wild parties to celebrate, except that we all have to rent our homes and our landlords won’t let us, of course.

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Remembering comments from younger people on an Italian house price story in 2012, unimpressed with 10%-20% off ponzi high prices, desperately wanting house prices to fall much much harder..... maybe they need a hpc and write loads of fresh mortgage debt. Fresh mortgage debt can be a solution. BoE now more concerned about low mortgage growth.

Don't let €1 houses for sale in Sicily fool you, when housing for workers so expensive. New Telegraph young woman journo isn't fooled either - same forces in play here.

Sounds familiar

It seems the European and most likely the UK recovery was just a bit pack of egyts trying to talk up the market and pretend everything was hunky dory.

.

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If they brought back the Lira then almost overnight they would be able to match the UK's tiger economy amazing recovery.

They'd likely end up have more zero hours employment than they could handle as well.

Edited by billybong

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If they brought back the Lira then almost overnight they would be able to match the UK's tiger economy amazing recovery.

They'd likely end up have more zero hours employment than they could handle as well.

The British solution for the Euro problem would be to have regional Euros all linked by variable exchange rates then controlled manipulated by local central bankers through money printing.

Everyone keep the Euro and counties get their control back.

The Perfect solution.

:P:P:P:P

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The British solution for the Euro problem would be to have regional Euros all linked by variable exchange rates then controlled manipulated by local central bankers through money printing.

Everyone keep the Euro and counties get their control back.

The Perfect solution.

:P:P:P:P

They could call them the Pound Euro (PEuro), the Lira Euro (LEuro), the French Euro (FEuro) the Deutsche Mark Euro (DEuro) and so on.

And the PIIGS from basket cases to tiger economies overnight.

Edited by billybong

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So they'll get inflation instead.

Lots of Italians in the Cambridge area. Their main dislikes of Italy seem to be the politicians, scumbags across the left/right board and two, the bureaucracy and difficulty of setting up in business. Simply re-adopting the lira aint gonna change that.

Until the Berlusconi types relinquish control of the media and the main opposite ceases to be an odd bunch of corrupt, self serving so called 'socialists', I can only see more and more of Italy's young leaving.

Once again, the boomers have wrecked another country thanks to their unending political support for the establishment forces.

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So they'll get inflation instead.

Lots of Italians in the Cambridge area. Their main dislikes of Italy seem to be the politicians, scumbags across the left/right board and two, the bureaucracy and difficulty of setting up in business. Simply re-adopting the lira aint gonna change that.

Until the Berlusconi types relinquish control of the media and the main opposite ceases to be an odd bunch of corrupt, self serving so called 'socialists', I can only see more and more of Italy's young leaving.

Once again, the boomers have wrecked another country thanks to their unending political support for the establishment forces.

Oh, Lord, blame the boomers again.

From what I've gathered from Italians it's far more down to an innate culture of nepotism/cronyism, where contacts are everything and if you don't have any you might as well not bother. And from what I gather that culture is supported regardless of age, by most people likely to benefit from it.

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Remembering comments from younger people on an Italian house price story in 2012, unimpressed with 10%-20% off ponzi high prices, desperately wanting house prices to fall much much harder..... maybe they need a hpc and write loads of fresh mortgage debt. Fresh mortgage debt can be a solution. BoE now more concerned about low mortgage growth.

Don't let €1 houses for sale in Sicily fool you, when housing for workers so expensive. New Telegraph young woman journo isn't fooled either - same forces in play here.

Italy has[1] a much more diverse market than the UK, not least in housing. While Rome is horrendously overpriced and ugly, you can get a house for loose change not so very far away: maybe as close as 50-100km.

Of course that won't be somewhere commutable to Rome. It won't be served by modern transport infrastructure (like paved roads with UK levels of potholes), and you'll soon be longing for a Tesco - or even a Coop - you can access in an hours journey.

I hadn't heard the story of €1 houses, but I don't think they're quite such an outlier - for an area not in demand - as the £1 houses in Blighty.

[1] Caveat: my information is not entirely up-to-date.

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