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May 20, 2005
Interesting Numbers.
Some are beginning to predict the breakdown of the whole Euro project:
Italy is in much the same mess as Argentina in the last throes of its disastrous dollar-peg and faces a "horrible martyrdom" as long as it remains inside the eurozone, according to a market report issued yesterday.
Banque AIG, the financial wing of the US insurance giant, said Italy needed a 20pc devaluation to prevent a slump and a "horrendous" explosion of public debt. The warning came as fresh data from Portugal and Italy point to the worst budget deficits since the launch of the euro.
Portugal's central bank has revealed that the country's deficit was likely to reach 7pc in 2005, far higher than earlier estimates. Lisbon is mulling "Draconian" cuts that risk driving the debt-laden economy into deep recession. Rome's REF research institute forecasts an Italian deficit of 5.7pc next year, smashing the EU's 3pc limit.
Although I live in Portugal I don’t really take part in the economy here, only as a consumer. One thing that we have noted is that the property market came to a complete halt a couple of years back. Despite nearly free money (interest rates are below inflation) those several friends who worked in property sales have all quit. There just aren’t that many sales going through. Just about the only thing that is happening is foreigners buying in and there aren’t that many of those, Portugal being so much more expensive than Spain. That’s not an overview of the completeeconomy, of course, just an indication of how cocked it is. I mean, really, 7% deficit? Sheesh.
May 20, 2005 in European Union | Permalink
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Comments
"Italy is in much the same mess as Argentina in the last throes of its disastrous dollar-peg and faces a "horrible martyrdom" as long as it remains inside the eurozone, according to a market report issued yesterday."
Wow. I certainly don't rate the Telegraph as the last word in Econ 101, but they are near to an important point here. I've been arguing this for ages.
If you know Bernanke's recent thing on the global savings glut, you will be aware that this is partly demographically driven by rapidly ageing societies like Japan, German and Italy living near the flatline.
Basically Italy will have difficulty growing however much it 'reforms', and can get into a nasty negative feedback cycle just like Argentina did, with no independent monetary policy available, and no control over its own currency.
Portugal is a similar case, and as you point out can't grow with even a 2% rate and 6% deficit.
Spain is different: for now. With sustained negative interest rates there is a huge (uk style) property boom and consumer credit driven retail sales boom. This howvere is sucking in imports at a frightening rate, and again no quick remedy available.
Euro-unwinding? Well a French and Dutch 'no' won't help its life expectancy. But short term I think it is pretty secure, if for no other reason than the fact that any real unwinding would have a huge global impact.
Mid-term I'm sure it will unwind. With - as the telegraph suggests - an initial disengagement by the 'club-med' countries a first phase.
Posted by: edward | May 21, 2005 7:48:25 PM
