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Italy faces 'horrible martyrdom' while in the eurozone

Italy is in much the same mess as Argentina in the last throes of its disastrous dollar-peg and faces a "horrible martyrdom" as long as it remains inside the eurozone, according to a market report issued yesterday.

Banque AIG, the financial wing of the US insurance giant, said Italy needed a 20pc devaluation to prevent a slump and a "horrendous" explosion of public debt...

[Italy and Portugal] have seen a sharp loss of competitiveness under the European Monetary Union, chiefly through higher wage inflation than Germany. They now face grinding "deflation" to claw their way back to health.

The AIG note, by chief economist Bernard Connolly, a former EU official and stern critic of EMU, said Italy was "being asked to bear the unbearable".

It has lost 30pc of its world share of exports since the late 1990s and is now "on its knees", according to the industry federation.

Toby Nangle, author of a new study on the Argentine crisis at Baring Asset Management, said there were close parallels between Italy's plight and Argentina's dollar-peg ordeal ... "Italy's fiscal and debt position is worse than Argentina's," he said.

Public debt is 105pc of GDP, and rising fast. Some $192billion of debt is due in 2005. The "spread" between Italian and German bonds has edged up over recent weeks ...

AIG said investors assumed there would be an EU bail-out if necessary, even though this breaches treaty law and would enrage German citizens.

"The endgame will be tortuous, but there can be no doubt that it will involve a rise in credit spreads and extreme weakness of the euro. An ultimate break-up can no longer be ruled out, however horrible its financial consequences," said Connolly. [Telegraph]

Italy minister says should study leaving euro

Italy should consider leaving the single currency and reintroducing the lira, Welfare Minister Roberto Maroni said in a newspaper interview on Friday....

Maroni cited Britain as a virtuous example of a country whose economy "grows and develops, maintaining control over its currency"...

Maroni also dismissed the idea that Italy's struggling economy could face an Argentina-style financial disaster if it abandoned the single currency.

"We're already heading toward Argentina, that's why we have to change direction," he said. [Reuters]

Stagflation fears beginning to stalk eurozone

Fears of stagflation cast a pall over the eurozone yesterday as fresh data pointed to the double curse of rising unemployment and inflation.

The Organisation for Economic Co-operation and Development said inflation had edged up to 2.2pc across the 12-nation bloc, reaching levels that are starting to unsettle economists. At the same time, the EU's Eurostat data office reported that the eurozone's jobless rate rose from 8.8pc to 8.9pc in March. Unemployment for those under 25 was 19.2pc.

The latest figures follow a shock decline in the eurozone's PMI manufacturing index released on Monday, which dropped through the 50 level usually seen as a recession indicator. Business confidence has tumbled in Germany, France and Italy.

Eric Chaney, an economist at Morgan Stanley, said the eurozone was now flirting with a dreaded "triple-dip" recession, citing a disturbing build-up of inventory and a "sharp deterioration" in overall economic conditions in France and Italy.

Inflation is now clearly above the European Central Bank's limit of 2pc fixed by treaty law ...

Jean-Philippe Cotis, the OECD's chief economist ... said the ECB was less able to manage the ups and downs of the economic cycle than the Bank of England or the US Federal Reserve because of the rigid structure of the eurozone's financial system.

Both the Italian and German governments lashed out at the bank last week, demanding rate cuts to drive down the exchange rate of the euro.

The currency markets are now starting to give their own verdict on the eurozone's outlook. The euro has fallen to 10-week lows against the Japanese yen and has slipped to 1.288 against the dollar, far off its highs earlier this spring. [Telegraph]

Great ... we have the prospect of watching a new Argentine crisis break out amid a continent of stagflation. Look out ahead!

Paul Krugman recently wrote about the return of stagflation in the US -- redefining the word to apply to an economy with above-average growth and below-average inflation rates.

Now, if he were to return for a moment to writing as a real economist once again, like in the old day, on the subjects of the Italian fiscal/monetary crisis and real stagflation with 9% unemployment in Europe (10% and 12% in its largest economies), I wonder what he'd say?

This would actually make an interesting few columns for the Times.

Alas, we'll probably never know.