Douglas McWilliams, chief executive of the influential London-based Centre for Economic and Business Research and former chief economic advisor at the Cbi, the British “Confindustria”, was among the first to openly speak about an Italian “default”. His warning, taking into account the financial debacles of the last days, seems to be more and more credible and concerning.
Professor, you stated that the failure of Eu leader to sort out their economic problems before the Summer holidays will cause major problems in Spain and Italy. What did you mean exactly?
What the EU needed to do at the summit of the 21th of July was to set out a credible plan for a fiscally federated Europe, in which each country will guarantee the other countries debt. But the qui pro quo would be to have an agreement on taxations and spending, under European supervision and not at national level. That would be the ultimate deal that could have saved the Euro. Instead they put a little more money into the intervention fund, postponing all decisions to the summit in October. That’s the main problem, that made them less credible to the markets. Even worse than that: they gave the impression that going out for holidays was more important than solving the problems.
Today the spread between the German and Italian bonds got bigger than the one between Spanish and German ones. Why?
Although the Italian government had done a good job in bringing down the deficit, the country has a real competitive problem. Before the Euro, Italy could devalue, become again competitive, and increase the export. Italy has been badly hit by the Euro, since the beginning, losing 40 per cent of its export market shares. All in less “sophisticated” areas, whereas Ferrari, Gucci, Prada are doing fantastically still. But the mass market export has been badly hit. And the lack of export success was translated in a growth that is virtually not existent. The problem is that today with such a little growth it will be extremely difficult to get the debt/Gdp ratio down. And the market know that. If a country as a rising debt/Gdp ratio, has little credibility on the financial markets.
Do you even imagine difficulties for Italy to finance itself on the markets trough selling bonds?
Unless of a credible European deal, it will not actually be very easy for Italy to sell bonds.
Pm Berlusconi stated that the country has solid economic fundamentals. Do you agree?
Certain parts of the Italian economy are in good shape, but the big problems with Berlusconi is that he didn’t have bad results in bringing down the deficit, but didn’t do anything to make the economy grow. The Italian economy is in a difficult situation: to make Italy competitive within the Eu means a massive labour market reform, a reform of bureaucracy. Nothing has been done on this. The impression about Berlusconi is that he is not focused on trying to solve the economic problems. It’s a bad impression to give: in the old days you could just devalue, today you have to make the fundamentals solids, like the German did.
Many times we have heard that Spain and Italy are too big to fail. Is it still true?
Too big to fail or to big to rescue? In the end everything is in the hands of Germany, which will decide the future of the Euro. If the Germans really want the Euro to survive, they will force through the reforms. Now that’s really where we are. They key of everything now is in Germany.
Everything is up to the Germans?
Yes, it’s up to them. But Berlin is divided in two factions. A group already gave up on saving the Euro. And the other group say: “although we don’t like it, German prosperity is dependent on making the Euro working”. My idea is that actually that the Euro was a political project that was pushed to far and too soon, among countries not still in line with each other. Let’s put it in this way: if I were Italy, I would be better out of the Euro.
You spoke about the danger of an Italian default.
I think that defaulting and devaluing is much less damaging than you would thing. Everyone thinks that this is impossible, but if Italy would follow this path, would have serious difficulties in the first couple of years, banks will loose money, but after the country will become again competitive, would grow again. There will be a future.
Exiting the Eurozone doesn’t sound like a realistic option, for now.
Economically speaking, it’s much more realistic than you think. But politically is still unmentionable. If I would be running Italy, with free hands and if I didn’t have to run for elections, that’s what I would do, because I think that the future would be much better.
Short-term forecast for Italy?
The growth will be very sluggish, and even could turn negative at the end of the year. And with the pressure of the markets, either Germany will agree on a credible bail-out plan, or the crisis will lead to the break-up of the Eurozone.