IMF veteran and Princeton professor Ashoka Mody is almost always a must-read on the euro (I reviewed his fine book on the single currency for NR a few years back). With a renewed Eurozone crisis not so much on the horizon as round the corner, and this time focused on Italy, this talk he has just given on a Mercatus podcast is well worth a listen or (there’s a transcript) a read.
It seems wrong to single out anything in this discussion, but perhaps I’d pay closest attention to this:
There is almost a consensus in the academic literature that the Euro did not increase trade among the member states of the Eurozone, but instead, because the Eurozone economies were growing relatively slowly, the bulk of the increase in trade occurred outside the Eurozone, and with China as the dynamo of this period, the global locomotive, the growth in European trade occurred in oodles with China, and especially Germany, which came out of the global financial crisis in 2009 not because of some great wonders they worked in their domestic economy, but because China was such a ready market for Mercedes Benz, BMWs, Audis, machine tools, high speed rail. The Chinese were gobbling this stuff, and the Germans, given their historical advantage in these mechanical industries, were pumping them out. So Germany looked like a wonder country, but really it was because China had this completely insatiable appetite.
And now?
Mody is pessimistic at what lies ahead for Germany — and yet this is at the same time as Germany is being asked to okay jointly issued debt by the Eurozone, debt that it would (effectively) ultimately underwrite . . .
And on the topic of Italian government debt (and not just Italian), Mody throws in some very gloomy data:
Italy is 135% of GDP. Spain and France are 100% of GDP, so three of the big Eurozone countries are not going to be able to do fiscal stimulus of 5, 7, 10% of GDP, which is basically what is going to be needed for this crisis. We’re going to need enormous amount of fiscal stimulus. Maybe Germany will do that. In the US, with this two trillion, they’re already at about 9% of GDP, and I expect that it will go up even more, for a number of reasons, but Italy cannot do anything close to that, or Spain cannot do anything close to that. That raises a huge policy question of how that is going to be dealt with.
Indeed it does.
Meanwhile (via Reuters):
Goldman Sachs said it sees Italy’s deficit at 10% and debt/GDP ratio at 160% in 2020…
Stretching the horizon to the summer, Fitch Rating will update its review on July 10. The agency currently rates Italy at ‘BBB’, two notches above ‘junk’, with a negative outlook like S&P Global.
A union is as strong as its weakest link.