Italy: It's Not About Macro (And Why It Doesn't Matter Anyway)

by: David Goldman

Today’s news that Italian prime minister Mario Monti has offered a debt reduction plan to Parliament should not be a cause for the market to rally: Italy can’t get there from here. Macroeconomists look at aggregate numbers, for example, Nourel Roubini (pdf), who recommends some combination of debt relief through a Brady-style bond exchange in order to reduce Italy’s debt-to-GDP ratio. What’s wrong about that is simple: No-one in Italy has the remotest idea of what GDP might be! A third of the economy is missing from official statistics, according ot the World Bank data. If you have studied macroeconomics, electroshock therapy might just remove the unwanted memories from your brain.

A close look at the numbers reduces all of this to absurdity. According to official data, which we reviewed in a recent Macrostrategist (pdf) report, Germany’s industrial production is up by nearly 20% since 2005 while Italy’s is DOWN by 10%. That’s a 30% relative swing! So much for the eurozone, which becomes a less and less compelling economic concept in an era when the BRICs are driving world trade growth.

In fact, no-one knows what Italy’s industrial production actually is. Most of Italy’s best products are made by family owned firms (think of Beretta, Ducati, Vespa and so on, as well as the great fashion houses). Who knows what correspondence there might be between their export invoices as reported to the tax authorities, and what they are actually paid?

The idea that a new government can walk in to Rome, raise taxes, cut spending, and toughen up enforcement, and somehow close the budget gap, is fanciful. The more you push austerity, the more Italian manufacturers will hunker down.

Bottom line: Italy’s financial soap opera will go on forever. German Chancellor Angela Merkel said precisely this when she characterized the crisis as a “marathon.” But it’s not the end of the world: It’s just the end of Italy! The EC will rescue the banks, and let the countries go bankrupt. And not a cent of current bank liabilities will go unpaid. That’s why the market mushroomed when the Fed offered cheaper swap lines to European banks via the ECB. There’s not going to be any contagion. Just national bankruptcies.

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