A Mile-High House of Cards
According to Webster’s Dictionary, an economic depression is “a period of time in which there is little economic activity and many people do not have jobs.”
Italy has had virtually no productive growth since it joined the euro in 1999.
Today, the Italian economy (real GDP per person) is smaller than it was at the turn of the century.
That’s almost two decades of economic stagnation.
The economy today is 10% smaller than it was before its peak prior to the 2008 financial crisis. More than 25% of Italy’s industry has been lost since then.
Unemployment is around 12%. Youth unemployment is around 36%. And these are only the official government statistics, which almost certainly understate the true numbers.
The International Monetary Fund (IMF) predicts it will take at least until 2025 for the Italian economy to return to its 2008 peak. Since nobody can accurately predict what’s going to happen next year, let alone nine years from now, the IMF is basically saying it has no idea how or when the Italian economy could ever recover.
The mass media and establishment economists don’t dare call it a depression. But a depression it is.
Italy’s populist Five Star Movement—or M5S, as it’s known by its Italian acronym—is now the country’s most popular political party. M5S blames Italy’s economic malaise squarely on the euro. I’d say a large plurality of Italians agree, and they have a point. They claim that, under the euro, Italian industry and exports have become uncompetitive. M5S believes a return to the lira could be the remedy.
Prior to joining the euro, Italy would regularly post large trade surpluses with Germany. Since joining, it has posted large trade deficits.
Because of Italy’s structural economic problems, it should have a significantly weaker currency. But since Italy is wrapped in the euro straightjacket, it gets monetary conditions that are far too tight than appropriate for the country.
Personally, I don’t think there should be such a thing as a central bank or “monetary policy.” That’s a discussion for another day. But that being said, it’s clear to me that the euro doesn’t suit the Italian economy.
In any case, nearly two decades of no economic growth have had consequences for Italian banks, which are now woefully undercapitalized.
The Italian economy is made up of many small and medium-sized businesses. Those businesses have taken out loans from Italian banks. But as the economy is in a depression, many of those loans have gone bad or will go bad.
This has created a crisis in the Italian banking system. It took years to build up, but now the situation is coming to a head. The Italian banking system is insolvent, and now everyone knows it. Shares of Italian banks have plummeted more than 50% so far this year.
Italian banks combined have a staggering $400 billion-plus worth of loans that are 90 days past due and unlikely to be repaid in full. These nonperforming loans (NPLs) account for over 18% of all outstanding bank loans and add up to over 20% of the Italian GDP.
By comparison, 5% of all outstanding loans in France are nonperforming… the figure is 1.5% in the UK… and 2% in the U.S. Italy’s NPLs are an enormous problem.