The Eurozone’s idiocy is obvious to all those with eyes and ears. It can be witnessed anywhere we turn these days: from the evolving bank run to the non-debate on eurobonds. Joseph Halevi, friend, co-author and serial guest of this blog, just sent me a missive that offers new insights into our continent’s infinite inanity: Italy’s major own-goal in consenting to (what I call) the fiscal waterboarding of Greece, Portugal and Spain. Here is Joseph’s note (with some additions by yours truly):
Last year the Italian Confederation of Industry threw themselves behind all the EU decisions in regard to Greece, Portugal, Spain. Thus they supported deflationary policies in regions where Italy has big (albeit shrinking) net export surpluses (which have been acting as a buffer in relation to its expanding deficit vis-à-vis Germany).
Suppose Il Sole 24 Ore, the daily of the Italian Confindustria, were to host on its front page a headline like: “In the US the financially strapped states are imploding and they account for 33% of Italy’s exports”. Panic would ensue with hundreds of articles flooding the Italian press. Well, this is precisely the situation in relation to Greece: Looking at 2008 figures, it turns out that Greece was absorbing Italian goods and services (mainly goods) equal in value to those that 100 million Americans consumed (i.e. Italy’s exports to Greece equalled 33% of Italy’s exports to the United States!).
In 2011, according to UN Comtrade, Italy’s exports to Greece fell by 46% compared to 2008; the natural victim of Greece’s implosion. In terms of the Italy-Greece balance of trade, whereas Italy’s export (to Greece)-to-import (from Greece) ratio was 5 to 1 in 2008, the Greek crisis reduced this to 2 to 1. Some Greeks may think that this is a good thing, in that Greece’s balance of trade has improved. But it isn’t really. Such shifts constitute improvements when there is an shift in relative competitiveness. When, for example, Greek goods improve in quality, relative to Italian ones, or when Greek production processes become more cost effective. But nothing of the sort applies here. The reason Italy’s balance of trade surplus with Greece collapsed was because Greece collapsed. Pure and simple. In this sense, a nuclear explosion that wiped out Greece, would totally eliminate its trade deficit. Would that be progress? No, it would not. Neither for Greece nor for Italy.
A similar story can be told in relation to the bilateral trade between Italy and Spain, Italy and Portugal, Italy and Cyprus (soon to ask for a bailout). Southern Europe and France were the safest areas for Italy’s net exports within the Eurozone. In the remaining Europe (north of the Alps), Italy could only compete via devaluing the lira (a main reason why Germany insisted on Italy’s inclusion in the Eurozone).
It is clear that Italy (both under Berlusconi and Monti) was keen to be seen to be part of Europe’s core. To that purpose, its leaders felt that they must be seen to be on the ‘right’ side of the waterboarding of Greece, Spain and Portugal. Alas, by supporting the troika’s policies, Italy turned against its own interests and, thus, contributed to its own demise in areas which hitherto generated hefty profits on the export balance. Even though it hates to admit it, Italy has already joined the ‘waterboarding experience’ on the ‘receiving’ side; taking its place amongst its victims (Greece, Spain and Portugal), patiently waiting to be waterboarded until all economic life is squeezed out of it.