Putting the Boot into Italy, by John Mauldin

Italy will go bankrupt. Perform an honest audit and the conclusion would be that it already has. From John Mauldin at mauldineconomics.com:

When Charles Gave, paterfamilias of Gavekal, chooses to express displeasure over an economic trend, an asset class, or what have you, he does not exactly mince words. If you happen to be in the room when he does so, he can sound like the Voice of God Himself, declaring from on high. And with his longish flowing white hair, he actually looks like central casting setting over to play the part.

Today Charles is exercised about Italy. He first reminds us that when Italy adopted the euro in 1999, he had argued that Italy would change from being an economy with a high probability of many currency devaluations to one with the certain probability of eventual bankruptcy. Now, he says, the fateful moment is not far off.

He gives us a couple of before-and-after charts: before March 1999 and from March 1999 to the present, in which he compares Italian and German industrial production and the performance of their respective stock markets. He notes that from 1979 to 1998, Italian industrial production outpaced Germany’s by more than 10%, and Italian equities outperformed German equivalents by 16%. That’s after taking into account the devaluations. Northern Italy is actually a production powerhouse, or was…

Then came the euro. Since 1999 Italian stocks have underperformed German stock by 65%, and since 2003 Italian factory output has lagged Germany’s by 40%. Thus, summarizes Charles, in this short essay,

The diagnosis is simply that Italy has become woefully uncompetitive, and as a result, is not solvent. This much is clear from the perilous state of its banking system, which is always the outcome when banks lend to firms that have been rendered uncompetitive by some reckless central banker….

This has to be the most well-telegraphed, and now inevitable, national bankruptcy that I have seen in my 45-year career.

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