Frankfurt / Rome (dpa) – The government crisis and new elections in Rome bring back bad memories. Is the closely interconnected euro area in danger of a new debt crisis? What gives economists hope: Some things are different from 2012.
Italy is the third largest economy in the euro area after Germany and France. “In addition to energy shortages and disrupted supply chains, the government crisis in Italy is another heavy burden on the euro area,” concludes Rasmus Andresen, spokesman for Green finances in the European Parliament. “The EU is at the start of a new economic crisis.” Chief Economist of Vice President Thomas Gitzel puts it in short: “Recession is coming.”
How closely are Italy and Germany economically linked?
The two heavyweights in the euro are trading intensively. In 2021, Italy was the sixth most important export market for the Federal Republic of Poland. According to data from the Federal Statistical Office, exports worth around EUR 75.3 billion were delivered to the country. In terms of imports to Germany, Italy ranks fifth, with imports a good 65.4 billion euros.
According to the Ministry of Foreign Affairs, Germany was both the most important sales market (12.8% of all exports) and the most important source of imports (16.4% of all imports) for Italy last year. If there are major changes in consumption, investment, or government spending in one of these economies, it could affect the other country.
What goods and services determine export and import?
Important Italian industrial exports include machinery, metal products, cars, electronics, and chemical and pharmaceutical products. There are also many products in the field of agriculture and nutrition, such as fruit, cheese, wine, confectionery, meat and drink specialties. Another group is fashion and textiles. In the first year of Corona 2020, exports in several of these categories fell. The Coldiretti farming association said the current political crisis in Italy was unlikely to affect the country’s agricultural exports – but extreme weather conditions with droughts and fires did.
For its part, Italy also imports a large number of industrial products or supplies of the components or materials that enter them. Energy, plastics, vehicles, textiles and food also have a larger share. And of course, the country is one of the most popular holiday destinations for German tourists, bringing in billions of dollars in revenues for hotels and restaurants during the holiday season.
What is the role of Italian mechanical and automotive engineering?
The heart of both sectors is in the North, where numerous, often highly specialized manufacturers of machinery and equipment live. They sell their products all over the world – many of them also to Germany, in the automotive industry about a fifth. Broken supply chains at the start of the pandemic caused problems for the industry, not least because of stagnant supplies from northern Italy.
At the time, the German metal and rubber industry called on politicians to work towards a more stable supply after then-Prime Minister Giuseppe Conte ordered the shutdown of all irrelevant production activities at the height of the first wave of the virus. This also applied to supplies for medical technology, such as fans. Northern Italy is also the region with the highest number of German direct investments in the country. In 2019, their portfolio amounted to over EUR 40 billion. In turn, car manufacturers such as the Stellantis Group – including Fiat, Lancia, Alfa Romeo and Maserati – are customers of German suppliers.
Is the Italian crisis leading to a new debt crisis in the eurozone?
In the summer of 2012, the euro area was on the brink. Players in global financial markets have lost faith in the debt sustainability of many countries. For example, government bond interest rates in Italy soared and speculators were betting on the euro crash. Southern European capital market interest rates have risen significantly again in the past few weeks. The yield gap – the spread – between German government bonds and those of the more indebted euro area countries widened. This means that in countries like Italy it will be more expensive to get new money. The European Central Bank (ECB) was forced to hold an emergency meeting in mid-June to calm the situation.
“There is no economic threat of a new debt crisis,” says Carsten Brzeski, chief economist at ING Germany. “All countries, including Italy, have used the last few years to reduce interest payments.” In addition, Europe is much better prepared today, says Brzeski, referring, inter alia, to to the ESM rescue package for the euro.
President Ifo Clemens Fuest sees it similarly: the euro area has “grown resilient through reforms such as steps taken towards a banking union.” But Fuest warns: “Nevertheless, we are currently seeing the events of the euro crisis, most notably rising risk premiums on Italian government bonds.”
Economists from DWS, a subsidiary of Deutsche Bank, recall that the euro debt crisis of 2012 “ruthlessly exposed the unfinished construction of the single currency.” Even today, the euro area resembles “a less integrated currency area than a fixed exchange rate regime with a single currency, but individual economic and fiscal policies and the fragmentation of labor and banking markets.”
What can the European Central Bank do?
In the summer of 2012, the then president of the ECB, Mario Draghi, set foot: “The ECB will do whatever it takes to save the euro,” promised the Italian (“Everything That Is Needs”). A little later, the central bank agreed to purchase, if necessary, unlimited amounts of bonds from countries hit by the euro crisis under the new OMT buy-back program – provided the country complies with the stringent reform requirements. The sheer determination of the monetary authorities calmed the financial markets.
A similar calculation appears to be behind the TPI aid scheme that has now been resolved. In this way, the ECB wants to intervene by buying bonds if necessary, should speculators disproportionately raise the interest on euro area securities. Countries no longer need to offer such high interest rates in the market if the ECB emerges as a large buyer.
“The ECB has enough resources to fend off speculative capital movements,” says Dekabank’s chief economist Ulrich Kater. However, TPI urgently needs to be supplemented by political measures. “It can only be a debt policy adjustment in a given country. These issues are to be resolved not in Frankfurt, but in Brussels and in the capitals of the member states ”.
© dpa-infocom, dpa: 220722-99-120214 / 2