In Las Vegas they call the really big gamblers – the ones whose fortunes can make or break a casino – the “whales”. For the European Union, Italy is the whale – the country whose economy and debts are so large that the fate of the single currency and the EU itself hang on its future.
Last week, Portugal became the latest country to succumb to the European debt crisis and to apply for a bail-out. But Portugal is a relative tiddler and its application for a bail-out was actually welcomed by the EU authorities. A Spanish bail-out, if it were ever to happen, would be much bigger – although the EU could probably still manage. But Italy is too big to bail.
As Portugal applied for its emergency loans, Italy was pre-occupied by other matters. On a beautiful spring morning in Milan, Silvio Berlusconi, the country’s prime minister, was put on trial, charged with having sex with an under-age prostitute.
This is just the latest and the most salacious of the many trials of Mr Berlusconi: there are three others under way and innumerable cases in the past, many of which ran into the sand of Italy’s statute of limitations. The widespread assumption that Mr Berlusconi will also dodge this latest prosecutorial bullet seemed to be confirmed when the sex case was immediately deferred until May. The prime minister himself is in jovial mood – joking recently to television cameras that polls showed that a third of Italian women say they would sleep with him, while the others said they would like to do so again.
Some Italians are amused by the Berlusconi follies, others are appalled. Then, there is a group of people who worry that the whole Berlusconi circus is distracting the country’s attention from the real economic and political challenges it may soon face.
In business and financial circles, there are those who worry that Italy will eventually be hit by the debt crisis. The country’s national debt is now nearly 120 per cent of gross domestic product – higher than the figures for Greece, Ireland and Portugal when they were forced to apply for help.
For the moment, Italy is having no problems financing and servicing its debts. But some worry that Italy’s situation is only tolerable in a climate of very low interest rates. One prominent businessman estimates that every half-a-per cent rise in interest rates would add roughly €10bn to the annual cost of servicing Italy’s debt. And last week, the interest rate cycle turned, as the European Central Bank raised rates by a quarter of one per cent. The pessimists worry that rising interest rates will push Italy into austerity and eventually make its debt burden intolerable.
There is, however, a more optimistic take, which was put to me by another senior Italian businessman. Italy has high debts but it also has high private savings. Most Italian debt is still bought domestically. Italian banks have been much more prudent than their German or British counterparts. The Italian budget deficit is relatively moderate at just over 4 per cent of GDP and Italy has managed a high level of government debt for decades.
I was reassured by this account. But then my interlocutor added, almost as an afterthought: “Of course, there is no example in history of a debt the size of Italy’s ever being paid back.” So what, I asked, is the way out, if the debt keeps growing? “Inflation,” he replied with a smile.
That one-word response would confirm the worst fears of many Germans. When the euro was formed, popular German anxiety focused on sharing a currency union, not with Portugal or Ireland – but with Italy. Italy’s history of currency devaluation and inflation was regularly cited – and these suspicions linger. When earlier this year, it became clear that Mario Draghi, an Italian, was the front-runner to be the next head of the ECB, the German tabloid Bild screamed: “Mamma mia! For Italians, inflation is a way of life, like tomato sauce with spaghetti.”
The argument over inflation plays into wider differences of culture and temperament. Italians were faintly astonished when the German defence minister was recently forced to resign for plagiarising parts of his doctoral dissertation. Meanwhile, Mr Berlusconi has, so far, survived allegations of everything from bribery to sex crimes.
While the Italian left would shudder at the thought, in some respects the resourceful Mr Berlusconi is representative of his country. Italian prosecutors have been trying to nail Il Cavaliere for years. On many occasions, it has seemed as if the prime minister was finished. However, Mr Berlusconi has always been convinced there is a way out – and, so far, he has always been proved right.
It is the same with Italy and its finances. The country has lived with chronic debt for years and, like Mr Berlusconi, it has always managed to avoid a day of reckoning. Mr Berlusconi’s favoured way out has been the statute of limitations. For the Italian government, the ultimate way out would be inflation – particularly if higher prices were blamed on global commodity prices and not accompanied by much higher interest rates.
There is one big difference, however: Mr Berlusconi’s fate is in the hands of Italian voters and judges. The fate of the Italian economy may ultimately rely on foreign bondholders, central bankers in Frankfurt and politicians in Berlin. They may be less forgiving than the Italian legal system.
Source: http://www.ft.com
Last week, Portugal became the latest country to succumb to the European debt crisis and to apply for a bail-out. But Portugal is a relative tiddler and its application for a bail-out was actually welcomed by the EU authorities. A Spanish bail-out, if it were ever to happen, would be much bigger – although the EU could probably still manage. But Italy is too big to bail.
As Portugal applied for its emergency loans, Italy was pre-occupied by other matters. On a beautiful spring morning in Milan, Silvio Berlusconi, the country’s prime minister, was put on trial, charged with having sex with an under-age prostitute.
This is just the latest and the most salacious of the many trials of Mr Berlusconi: there are three others under way and innumerable cases in the past, many of which ran into the sand of Italy’s statute of limitations. The widespread assumption that Mr Berlusconi will also dodge this latest prosecutorial bullet seemed to be confirmed when the sex case was immediately deferred until May. The prime minister himself is in jovial mood – joking recently to television cameras that polls showed that a third of Italian women say they would sleep with him, while the others said they would like to do so again.
Some Italians are amused by the Berlusconi follies, others are appalled. Then, there is a group of people who worry that the whole Berlusconi circus is distracting the country’s attention from the real economic and political challenges it may soon face.
In business and financial circles, there are those who worry that Italy will eventually be hit by the debt crisis. The country’s national debt is now nearly 120 per cent of gross domestic product – higher than the figures for Greece, Ireland and Portugal when they were forced to apply for help.
For the moment, Italy is having no problems financing and servicing its debts. But some worry that Italy’s situation is only tolerable in a climate of very low interest rates. One prominent businessman estimates that every half-a-per cent rise in interest rates would add roughly €10bn to the annual cost of servicing Italy’s debt. And last week, the interest rate cycle turned, as the European Central Bank raised rates by a quarter of one per cent. The pessimists worry that rising interest rates will push Italy into austerity and eventually make its debt burden intolerable.
There is, however, a more optimistic take, which was put to me by another senior Italian businessman. Italy has high debts but it also has high private savings. Most Italian debt is still bought domestically. Italian banks have been much more prudent than their German or British counterparts. The Italian budget deficit is relatively moderate at just over 4 per cent of GDP and Italy has managed a high level of government debt for decades.
I was reassured by this account. But then my interlocutor added, almost as an afterthought: “Of course, there is no example in history of a debt the size of Italy’s ever being paid back.” So what, I asked, is the way out, if the debt keeps growing? “Inflation,” he replied with a smile.
That one-word response would confirm the worst fears of many Germans. When the euro was formed, popular German anxiety focused on sharing a currency union, not with Portugal or Ireland – but with Italy. Italy’s history of currency devaluation and inflation was regularly cited – and these suspicions linger. When earlier this year, it became clear that Mario Draghi, an Italian, was the front-runner to be the next head of the ECB, the German tabloid Bild screamed: “Mamma mia! For Italians, inflation is a way of life, like tomato sauce with spaghetti.”
The argument over inflation plays into wider differences of culture and temperament. Italians were faintly astonished when the German defence minister was recently forced to resign for plagiarising parts of his doctoral dissertation. Meanwhile, Mr Berlusconi has, so far, survived allegations of everything from bribery to sex crimes.
While the Italian left would shudder at the thought, in some respects the resourceful Mr Berlusconi is representative of his country. Italian prosecutors have been trying to nail Il Cavaliere for years. On many occasions, it has seemed as if the prime minister was finished. However, Mr Berlusconi has always been convinced there is a way out – and, so far, he has always been proved right.
It is the same with Italy and its finances. The country has lived with chronic debt for years and, like Mr Berlusconi, it has always managed to avoid a day of reckoning. Mr Berlusconi’s favoured way out has been the statute of limitations. For the Italian government, the ultimate way out would be inflation – particularly if higher prices were blamed on global commodity prices and not accompanied by much higher interest rates.
There is one big difference, however: Mr Berlusconi’s fate is in the hands of Italian voters and judges. The fate of the Italian economy may ultimately rely on foreign bondholders, central bankers in Frankfurt and politicians in Berlin. They may be less forgiving than the Italian legal system.
Source: http://www.ft.com
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