‘Update on Italy, The consequences of contagion?

Today’s Detailed Commentaries Eurozone >> Italy: Update on Italy Why Read: Because Italy may already be ‘the next big thing’ in the Eurozone economic crisis. Everyone needs to be aware of that, and one ‘buries their head in the sand’ on this at their own peril.

Commentary: In 2011 Italy’s GDP rang in at U.S.$2.2 trillion, making it the Eurozone’s third largest economy after Germany (U.S.$3.6 trillion), France (U.S.$2.8 trillion), and larger than 4^th largest Spain (U.S.$1.5 trillion). In 2011 Italy’s reported GDP was just over 3% of world reported GDP. To put the Eurozone’s 2011 combined 17 country GDP in perspective, at U.S.$17.6 trillion it was 16% larger than that of the United States. Reports today say that Italy’s economy contracted by 0.7% in Q2 2012, which is the third consecutive quarter of Italian recession – with no end and seemingly worsening conditions in sight. Moreover, one news report this morning reproduced an interview with Italian President Mario Monti where – assuming the interview is reported correctly – he is quoted as saying (among many other things):

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“If everything goes according to plan, I will remain in office until April 2013, and I hope that I can rescue Italy from financial ruin by then " and this with moral support from a few European friends, led by Germany”. On the face of things, and assuming Mr. Monti meant what he apparently said and he didn’t fall victim to using ‘a bad choice of words’, for him to say “I hope I can rescue Italy from financial ruin by then (April 2013)” can’t be thought of as trite. April 2013 is only 9 months away. If Stephen Harper, Canada’s Prime Minister, made such a statement, I would be immediately be ‘in the market’ for the best arable, secluded farmland I could find – preferably since it is August, with this year’s edible crops well on the way to maturity. I suggest you take some time and scan the three referenced articles. The third one includes a number of brief commentaries on European economic developments beyond those of Italy. Note: GDP source – Wikipedia Topical Reference: Here’s The Interview With The Italian Prime Minister That’s Made The Rest Of Europe Livid, from Business Insider, Joe Weisenthal, August 6, 2012 – reading time 2 minutes; Italy sinks deeper into recession as Monti’s problems swell, from The Globe and Mail, from Reuters, August 7, 2012 – reading time 2 minutes; and Debt crisis: As it happened – August 7, 2012, from The Telegraph, Matthew Sparkes, August 7, 2012 – reading time 1 minute. World >> Economy: The consequences of contagion? Why read: Because if you think about it, this can be argued to offer a suggestion (and a warning) of how much at risk the so-called ‘systemic country economies’ currently are. Commentary: The International Monetary Fund has, in a report titled 2012 Spillover Report, attempted to quantify potential world effects that may arise from economic difficulties faced by China, the Eurozone, Japan, the United Kingdom and the United States. These countries are referred to as the five ‘systemic economies’. I have taken ‘systemic’ to mean the ‘most cross-linked’, and hence those most susceptible to ‘contagion’ if one or more serious economic events or problems arises going forward. The IMF seems to think that if the European Union authorities don’t ‘act in time’, Eurozone growth will be negatively impacted by 5%, the U.S. growth by about 2%, and growth for the other three by between 0.5% – 2.5%. That leads, or so I think, to the following important questions:

• what does ‘act in time’ mean in the context of elapsed time? Weeks, months, or years – or, perish the thought, has ‘act in time’ come and gone already?; and,
• how credible are the IMF assumed results? What precisely did the IMF account for? How have they specifically integrated ‘derivatives issues’, when no one seems to know the U.S.$ value of aggregate outstanding derivatives? And so on?

Intuitively, I suspect the IMF’s conclusions are ‘inadequate on the low side’ if there ever proves to be serious contagion issues. I also think that politicians in the Eurozone and America have both ‘left it too long’, in circumstances where I believe more quantitative easing – if and when it comes – will be nothing more than a band-aid stuck on the wound created by a leg amputation. You can link to the IMF ‘spillover report’ through the referenced article, and read it for yourself. Dated July 9, 2012, it is a 20 page report that strikes me as ‘more than a little’ academic in its approach to what has to be an extraordinarily difficult thing to analyze. Topical Reference: How Bad Could EU Crisis Get? IMF Attempts an Answer, from The Wall Street Journal, Real Time Economics, Ian Talley, August 6, 2012 – reading time 2 minutes.