Spain and Italy: The Euro Crisis Gnaws at Europe’s Underbelly

Published on Spiegel Online International, by staff, February 20, 2013 (Photo Gallery).

The euro crisis may have dropped out of the headlines recently, but Spain and Italy would seem to be doing their best to bring it back. Real estate giant Reyal Urbis’ bankrupcy has raised fresh concerns about Spanish banks and many fear that a Berlusconi election victory could drive Rome to seek emergency aid … //

… Extremely Shaky:

  • Still, the insolvency has not come as a surprise. The Spanish real estate market has shown no signs of improvement in recent months and prices continue to fall — with property in the country having lost 40 percent of its value since 2007. It is a development which has hit construction giants like Reyal Urbis hard and is largely responsible for the troubled state of Spain’s banks. Even worse, experts do not expect things to improve any time soon.
  • In addition, new regulations from Madrid have forced companies to undertake larger write downs on their property holdings. And the establishment of a bad bank has also meant that it now often makes more sense for financial institutions to pull the plug on bad loans rather than to patiently agree to refinance.
  • Beyond the country’s financial industry, however, the insolvency provides yet a further indication as to just how far away Spain remains from economic health. Unemployment remains at a record high of 26 percent and data from the fourth quarter of 2012, showing a worse-than-expected contraction of 0.7 percent, has cast doubt on a return to growth this year.
  • Furthermore, the government of Prime Minister Mariano Rajoy is struggling to survive an ever-expanding series of corruption scandals, some involving his own conservative Popular Party. This week, Spanish papers are reporting that King Juan Carlos may even be more tainted than thought by an ongoing scandal involving his son-in-law Inaki Urdangarin.

The Need for a Bailout?

  • Despite the troubles in Spain, however, it is Italy that has Europe — and Berlin in particular — holding its breath this month. The reason the country’s general election scheduled to be held on Sunday and Monday — and the real risk that former Prime Minister Silvio Berlusconi might actually win the vote.
  • Though public opinion polls are banned in the country for the two weeks prior to elections, the Italian media is reporting this week that the camp of center-left candidate Pier Luigi Bersani’s lead over Berlusconi’s coalition has shrunk to a mere 3.5 percent. And if Berlusconi returns to the helm, most expect that Rome will return to the abyss it found itself staring into at the end of 2011. Indeed, Italy’s largest investment bank Mediobanca said this week that it believes a Berlusconi victory would trigger an investment market shock, ultimately leading to the need for an EU bailout of the debt-laden country.
  • Berlin, too, has warned of a Berlusconi resurrection, with German Foreign Minister Guido Westerwelle issuing a barely concealed admonition to Italian voters on Tuesday. He was echoed by Ruprecht Polenz, the chairman of the Foreign Affairs Committee in German parliament and a senior member of Chancellor Angela Merkel’s Christian Democrats (CDU).
  • Norbert Barthle, CDU budget expert in parliament, was even starker in his warning. Speaking to Reuters, he said: “If Mr. Berlusconi wins the election, this course (of reforms) could be in danger. Doubts about Italy’s solidity could have serious consequences for the euro.”

Back to the Drawing Board:

  • Ultimately, those doubts might multiply regardless of who wins the election. Mario Monti, the country’s outgoing technocrat premier, was able to shave percentage points off the budget deficit and introduce modest reforms. But the last six months of his 14-month stint was less productive as he began encountering resistance. And the country’s next government, whether from the right or the left, likely won’t have a mandate sufficient enough to make much headway either.
  • That such headway is badly needed has been well documented, most recently by the Economist, which noted that Italy is one of only two euro-zone countries which have seen a fall in per-capital GDP since the introduction of the euro. Globally, it ranks 169th out of 179 since 2000 in terms of per capita GDP growth.
  • The International Monetary Fund recently noted that the Italian economy stands to make huge gains if the country’s politicians can agree on a far-reaching package of economic and labor market reforms — worth up to 10.5 percent growth over the next decade. But if Berlusconi wins next week, the opposite, it would seem, also holds true. Italy could trigger a return of the euro crisis, just when Europe thought it was out of the woods.

(full text).

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The Global Resonance of the Real Democracy Movement: In a new paper, ROAR authors Leonidas Oikonomakis and Jerome Roos recount how the struggle for real democracy resonated with activists around the globe, on ROARMAG, by ROAR Collective, Feb 18, 2013.

Que No Nos Representan: The Crisis of Representation and the Resonance of the Real Democracy Movement from the Indignados to Occupy, a PDF;

Blog: Rupert’s Read;

The services sector: The post-industrial future is nigh, on The Economist, Feb 19, 2013;

The Real Reason the Eurozone’s Unhappy Marriage Has Not Broken Up Yet, on naked capitalism, by Martin Wolf, Feb 20, 2013;

Income redistribution in the United States 1913-2011 (2 graphs), on RWER Blog, by David Ruccio, Feb 18, 2013;

How the Belgians really broke the repression by the financial markets,  on Real World Economics Review Blog, by merijnknibbe, Feb 13, 2013 (Update 17/2/2012: the ‘picture’ of the text of the letter suddenly blacked out, click on it and you can read the text).

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