A few weeks ago, I stayed in the Grand Hotel in Rimini. This place has real significance for Italian movie lovers because this was the base camp for the brilliant Italian director Federico Fellini.
Not only did Fellini use the Grand Hotel in Rimini as his set, but he died there too, in the suite upstairs that he used as his office.
Fellini loved the absurd, the ridiculous. His movies, with their outrageous casts of Italian eccentrics, captured the booming, confident Italy of the 1950s, 1960s, 1970s and 1980s. In many ways, Fellini was post-war Italy’s scriptwriter.
But Fellini’s Italy is gone.
Italians are naturally nostalgic for that booming post-war period of nearly 50 years’ growth when Italy was rich, when mass immigration wasn’t an issue and when Italian produce was sold all around the world.
Sometimes it is not appreciated quite how industrial Italy is. It has long been Europe’s second-biggest manufacturing power, beaten only by Germany. In some areas of design and high-quality manufacturing, Italy is still without peer.
However, since it gave up the lira and adopted the euro – in effect Germany’s currency – things have gone pear-shaped.
From 1945 to 1995, there was an understanding that Italy would devalue the lira. This is what Italy did. Traditionally, it devalued the lira every few years. This was expected and it kept Italian industry competitive.
So, for example, when Italy joined the EMS in 1979, the exchange rate was 443 lira per deutsche mark. By 1990, the year of German reunification, the rate was 750 lira to the deutsche mark. By 1995 it was 1,000 lira to the deutsche mark.
In the 1992 currency crisis the lira fell to a low of 1,250 against the deutsche mark before recovering a bit.
The gradual fall in the value of the lira was a price that the Italians were prepared to pay for industrial success. Contrary to the dogma spouted by Europe’s central bankers, Italian devaluations worked particularly well.
Just look at the numbers.
From 1979 to 1998, Italian industrial production outpaced that of Germany by more than 10 per cent. Italian equities outperformed German equivalents by 16 per cent – after having taken into account the devaluations.
So not only was Italian industry growing faster than German industry, aided by lira devaluations, but also the return on capital in Italy was higher than Germany.
This is because if the stock market of a country is outperforming another, it implies that the capital that is deployed in the faster growing country is being deployed more efficiently. Therefore, not only was Italy growing faster than Germany, but it was more efficient too.
Then came the euro.
Since Italy joined the euro, almost to the day, Italian industry has gone backwards. Having outperformed German stocks during the period of the lira, Italian stocks have underperformed German stocks by a whopping, bankruptcy-inducing 65 per cent.
During the half-century when Fellini was writing the story of post-war Italian success, the Italian stock market almost always returned more than the German stock market. Once Italy joined the euro that stopped almost overnight.
Deep in the economy, the strictures imposed by the euro have destroyed much of Italian industry. For example, having outgrown Germany’s industrial output in the 1980s and 90s by 10 per cent, Italian factory output since Italy joined the euro has lagged Germany’s by 40 per cent.
This is an extraordinary reversal of the previous 50 years.
While German industrial might has solidified in the euro, Italy has become enfeebled. For example, almost one manufacturing firm in five in Italy shut down between 2009 and 2012.
Production is now 26 per cent below 2007’s peak.
In short, Italian competitiveness has been decimated by the euro. Without devaluations, Italian industry has floundered. Either a country’s currency adjusts if it is not as competitive as its neighbour, or it goes out of business. Italy is gradually going out of business.
Now think about Italian banks and Italian debt. Italy has the largest debt/GDP ratio in Europe at 130 per cent and its banks are extremely weak. The EU knows that if Italy’s banking crisis is not managed properly, there will be contagion across the entire eurozone. So Frankfurt is nervous.
On Thursday, the ECB extended its “delay and pray” policy of buying up every asset that isn’t nailed down. It announced that it would extend quantitative easing until next December. This means that it will become the “buyer of last resort” for all sorts of financial assets.
However, while it is giving the banks this sort of general support, it hopes to isolate specific bust banks and force them to either raise money or burn their bondholders.
This new policy is obviously precisely the opposite of the ECB intervention in Ireland.
Therefore, late on Friday the ECB refused the Italian government’s attempt to buy more time to find money for its stricken bank Monte dei Paschi di Siena. This bank is likely to be bailed out by the state this weekend, but with significant losses imposed on the bondholders, who are largely local Italian people whose pension funds bought bank bonds.
But for Italy the issue is not whether it can, in the short term, manage liquidity problems in its banks; the really big issue is whether the Italian state itself is solvent.
By joining the euro and abandoning the tool of regular devaluations on the altar of European integration, Italy has imperilled itself. It is profoundly uncompetitive. When a country becomes uncompetitive, it eventually becomes insolvent because it has no way of paying its debts.
It is very clear, when you look at the numbers that Italy will become insolvent at some stage. In the euro, its trajectory versus Germany is now more or less fixed. The 50-year, post-war policy of devaluations helping Italian industry and keeping up with Germany is now over.
Italy is now lagging far behind and it is falling further adrift.
This is a big deal for Europe and the euro. Italy is not Greece.
When this event happens no one can be sure, but that it will happen is, at this stage, beyond doubt.
Maybe for watchers of Europe, the real question is not when Britain leaves the EU, but whether Italy goes bust before Britain goes off.
What odds would you give on that?
So what country, apart from Gross Deutschland, has the Euro benefited? France, Spain and Italy either either in the toilet or swirling around, about to head south. Ireland, Portugal and Greece rightly shagged over the last few years. The East European newbies have, to my limited knowledge, been bled dry. To all intents and purposes, the Euro has already failed. Economiclaly and politically the region is a basket case.
Subscribe- heading to Italy soon on my honeymoon – hope it still exists by then!
What is going to happen if Italy, France Portugal, Spain continue to limp along under the weight of the euro? This conversation has been going on for years now and the mess continues. Some have suggested that there will be popular uprisings but this too has been predicted time and time again and nothing happens.
“Fellini loved the absurd, the ridiculous.”
I have to say I do too take “Suds” for example……………….
HI David,
One superb article after another now. The article is a treatise for Italy to leave the Euro. Ireland surely must be coming to the same conclusion?
When you see Sutherland being given a top lecturing job at the LSE and how globalisation has backfired so spectacularly doesn’t it make a mockery of education in matters Economic? What nonsense will be drilled into the heads of the economic students who study there?
Michael.
Top Conspiracy Theories about India’s Demonetisation Mess
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http://www.cabaltimes.com/2016/12/11/rupee_goes_awol/
ah no…you see what we need here is a War A wha ? A war…. don’t we already have several ? Na.. their only police actions , just trying out new weapons and keeping Middle east on its toes… are you nuts ? A war in Europe ? Oh yeah.. good idea , last European war was great for business But we would have to move a lot of Troops and material up to the Russian border , is that what your talking about ? Russia ? mmmmmm. yeah , that’s good , why not Russia ? Excuse me ?… Read more »
EU was Mussolini & Churchill & Moseley & Kalergi & Hitler project.
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And, Italy is very interested in Adolpho Hitler now ;
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http://www.express.co.uk/news/world/741564/Italy-schoolchildren-books-survey-Mein-Kampf-Adolf-Hitler-Alessandro-Fusacchia
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Here are the Google.com results for the search terms ;
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Coudenhove Kalergi plan for Europe
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https://www.google.com/?gws_rd=cr&ei=5ppOWIPvJ8n9vgTOwK3YDw&fg=1#q=coudenhove+kalergi+plan+for+europe
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The Kalergi plan is quite sinister !
Hi David, I’m a big fan of your articles but I’m not sure on the causality here. You’re only looking at half the picture. If Italy devalued the lira, that gave Italian exporters a brief advantage as they were able to undercut foreign competition. But think about this more deeply and it’s not so simple. Anything Italian companies would have imported becomes more expensive because of the devaluation. Likewise, prices in lira increased and also wages would have likely increased because of the constant / serial depreciations. So it’s not a one way street to better competitiveness. If anything, serial… Read more »
“This new policy is obviously precisely the opposite of the ECB intervention in Ireland.” Exactly, but look at who the bondholders are, “largely local Italian people whose pension funds bought bank bonds.” Not French or German banks who had to get their money back at any cost. Is it any wonder the anti-establishment movement is gaining strength around the world, not in Ireland of course where the Fianna Fail/Fine Gael axis is firmly in control still.
“whether Italy goes bust before Britain goes off. What odds would you give on that?” Sadly since I laughed so much at PaddyPower it dawned on them that they have no experts on politics and their politics offer is now both narrower and with worse odds. But – it’s a bet in which I am inclined to follow your advice, David (especially after what I wrote just before Brexit about triggering article 50 and a legal loophole I have found). P.S. I have also found a really good legal loophole in Nuremberg Laws, but as I am sharing everything with… Read more »
No. If MNCs sponsor our third level institutions they will make them into an even worse mismatch of money and performance. The current “bottom line” in Irish Third level is to fit with what the IDA are selling. We are in Potemkim Village territory. We have seen the state go through insolvency, for the sake of protecting the culture of “who you know rather than what you know”. America did something very similar under Bush 2 & Obama. The Irish university system has escaped uncritiqued, from the debacle. Even more astounding, the Irish concept of management has also escaped uncritiqued,… Read more »
There are three reasons for why Jesus was clearly an Italian. They are to be found in the common answer to these three questions:
Who else could live at home with his mother until the age of 32 and still have any self respect?
Who else could possibly believe that his mother was a still a virgin?
And what mother could believe her son was the son of God?
GOOD NEWS !
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REVERENCE FOR THE RIGHT TO “LIFE”, & HOPEFULLY ALSO THE RIGHT TO “LIVE”
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THIS IS EVEN MORE IMPORTANT FOR U & EVERY PERSON UNBORN, PRE-BORN, & BORN THAN SOUND MONEY & BANNING OF PRIVATE CENTRAL BANKING & FRACTIONAL RESERVE BANKING & USURY ITSELF & ALSO THE BANNING OF LANDLORDISM.
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BREAKING:
Ohio Senate passes bill banning abortion after baby’s heartbeat detected
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https://www.lifesitenews.com/news/breaking-ohio-senate-passes-heartbeat-bill-after-length-battle?utm_content=bufferef877&utm_medium=social&utm_source=lifesitenews%2Btwitter&utm_campaign=buffer
I think that Holly-weird “is gradually going out of business” too.
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Child casualty of the entertainment industry.
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Be careful of allowing ur children getting involved with the entertainment industry.
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http://aanirfan.blogspot.com/2016/12/jack-wild-hollywood-mind-control.html
So what have the Romans ever done for us? Well David is talking about the Italians – fractured and all as they may be… The sketch could be “what did the EU ever do for us???” Going against the thrust of recent posts, I believe the ideals of the EU were and remain well…idealistic…and in this money grubbing, batten down the hatches, crude world of today those ideals remain worth striving for…I do. Anyone read any European history???? We cannot, like the sleepwalking lady Macbeth “out, damned spot”, claim pure innocence in the strategies and decisions we the Irish have… Read more »
The real issue is whither Ireland? I think it is very important that issues like the Italian situation are identified. But what should Ireland be doing about. We’re back to strategic planning. In very simple terms where is Ireland’s 30 year plan – In 30 years time our population will have increased by 1m. For example and this should be published for all to see. What is Ireland’s infrastructural plan for the next 30years. Show me a map of Ireland with- Road infrastructure. Hospital infrastructure. ETC. Put a plan like that together, sign off on it, publish it and you’ve… Read more »
Question-
Has QE failed or is it doing exactly what it was intended to do (but not what we were told was intended)
We were told QE was intended to restore inflation to the stated (never justified) target rate.
QE hasn’t done this but it’s done loads of other things.
QE could have been used to sort out the EUs banking problems, surely the printers (The ECB) primary responsibility. It wasn’t – why wasn’t it?
David – re your second last paragraph.
An Italian implosion would surely strengthen the UK’s negotiating hand.
Hi Pi Squared, . U say ; . “…I believe the ideals of the EU were and remain well…idealistic… And in this money grubbing, batten down the hatches, crude world of today those ideals remain worth striving for…I do. Anyone read any European history ???? …” But, the fact is that the real father of the EU project Mr. Kalergi said ; . The man of the future will be of mixed race. The races and classes of today will gradually disappear due to the elimination of space, time, and prejudice. The Eurasian-negroid race of the future, similar in appearance… Read more »
FROM THE MAN WHO SHOULD NEVER HAVE RETIRED FROM USA’s HOUSE OF CONGRESS ; THIS COMMENT IS NOT ESSENTIALLY PRAISE, BUT RATHER A REBUKE BECAUSE HE IS DRASTICALLY NEEDED TO BE THERE INSTEAD OF HIS CURRENT POSITION. . War on ‘Fake News’ Part of a War on Free Speech . RON PAUL DECEMBER 11, 2016 600 WORDS . EXTRACT . A major threat to liberty is the assault on the right to discuss political issues, seek out alternative information sources, and promote dissenting ideas and causes such as non-interventionism in foreign and domestic affairs. If this ongoing assault on free… Read more »
Another great anti-Euro hit piece by Nigel McWilliams.
EU TO PUSHES LAWMAKING INTO SECRET
-> FOR EFFICENCY
http://www.express.co.uk/news/politics/743046/Brussels-EU-lawmaking-secret-voters-democracy
http://www.politico.eu/article/where-european-democracy-goes-to-die-european-parliament/
“If this were a dictatorship it would be a heck of a lot easier” G.W.BUSH
So what’s new? “That is, until you realize the stock of the “Vampire Squid” itself, Goldman Sachs, is responsible for a whopping 30% of the Dow’s post-Trump gain, due to the facts that former Goldman partner Steve Mnuchin was nominated to be Trump’s Treasury Secretary; current Goldman Chief Operating Officer Gary Cohn was appointed as head of Trump’s National Economic Council; and last but not least, the Dow is a price-weighted average, with Goldman its highest priced – and thus, most influential – stock. In other words, a mirage of statistical chicanery, amidst an ocean of the very crony capitalism… Read more »
http://www.newsmax.com/MichaelReagan/democrats-russia-ronald-reagan/2016/12/13/id/763730/?ns_mail_uid=102706694&ns_mail_job=1699812_12142016&s=al&dkt_nbr=ccudlbgl
Democrats Secretly Worked With Russia to Oppose My Dad
“From 1945 to 1995, there was an understanding that Italy would devalue the lira.” “The gradual fall in the value of the lira was a price that the Italians were prepared to pay for industrial success.” “In short, Italian competitiveness has been decimated by the euro. Without devaluations, Italian industry has floundered. Either a country’s currency adjusts if it is not as competitive as its neighbour, or it goes out of business. Italy is gradually going out of business.” Looking at these statements it seems that Italy NEVER WAS COMPETITIVE. The only way it could maintain itself was to devalue… Read more »
http://www.gopusa.com/?p=18312?omhide=true
If electors do not vote the wishes of the constituency it will not be the first time.
http://www.fairvote.org/faithless_electors
Will Trump Defy McCain & Marco?
“If just three GOP senators vote no on Tillerson, and Democrats vote as a bloc against him, his nomination would go down. President Trump would sustain a major and humiliating defeat.”
http://www.gopusa.com/?p=18286?omhide=true
Inflation??
Would this be an inflationary indication?
Year over year increases
Copper 24%
Nickel 30%
Aluminum 17%
Zinc 90%
Lead 47%
Silver 25%
Gold 10%
Does this justify the US rate hike.? Just asking.
CHRIS POWELL, Secretary/Treasurer Gold Anti-Trust Action Committee Inc. CPowell@GATA.org Forget about Fake News – Worry about Fake Money Money Metals News Service December 13th, 2016 Post-election airwaves and publications today are filled with bad news, good news, and fake news. The bad news is ‘fake news’ is very real. The good news is fake news is nothing new. The even better news for gold and silver stackers is they have learned to live with decades of fake news about sound money. You already know all about fake news. It used to go by other names – lies, propaganda, false advertising,… Read more »
http://www.silver-coin-investor.com/The-Silver-Tsunami.html “”Central banks are engaged in a desperate battle on two fronts What we see at present is a battle between the central banks and the collapse of the financial system fought on two fronts. On one front, the central banks preside over the creation of additional liquidity for the financial system in order to hold back the tide of debt defaults that would otherwise occur. On the other, they incite investment banks and other willing parties to bet against a rise in the prices of gold, oil, base metals, soft commodities or anything else that might be deemed an… Read more »
The ECB is purchasing 80 bn of bonds, mainly govnt issues every month. Colm Mc Carthy in last Sundays Ind reckons that if a fraction of what has already been spent buying govnt bonds at negative yields had been forced on the banks, the european banking crisis would be over. In 2008 the national debt was 50bn. Allowing for 50bn Irish bankers related debt, from where did the other 100bn of our 200bn debt come in just a few years? 100bn in just a few years. 3.5bn per yr for the next generation to service. Can we really afford to… Read more »