Italy and Spain: Hard to Ignore Economic Facts

By: Asha_Bangalore

The euphoria of the EU summit of June 28-29 is fading as markets comprehend that the eurozone has only bought time but not addressed the fundamental fact that economic growth is necessary to secure the future of the eurozone. In other words, economic facts are hard to ignore. First, outstanding Italian sovereign debt is in the neighborhood of €1.8 trillion and that of Spanish sovereign debt is approaching €600 billion. Therefore, the firepower of the European Stability Mechanism (ESM) of €500 billion is inadequate, even if the differing maturities of these securities are taken into consideration, in the current economic environment.

Second, both Italy and Spain have recorded two quarters of declines of real GDP and a third is nearly certain. Ingredients are not in place to arrest weakening economic conditions in these two economies.

Third, Italy and Spain are experiencing a severe lack of job creation, with the Italian unemployment rate at 10.1% in May and Spain has recorded a staggering 24.6% jobless rate in the same month (see Chart 3).

The European Central Bank (ECB) has injected a trillion euros into the banking system and markets are expecting additional monetary policy support at the July 5 meeting. In the meanwhile, the fourth important fact to note is that lending in the Euroland is contracting, which supports the bearish outlook for the region (see Chart 4).

The bottom line is that without a concrete plan to increase employment and growth, which was lackluster in Italy and Spain before the crisis also (see Chart 1), it is not conceivable how fiscal revenues will improve, debt ratios will drop, and the financial sector will return to pre-crisis status. Until then, the Euroland saga and market volatility will persist.

Asha Bangalore — Senior Vice President and Economist

http://www.northerntrust.com

Asha Bangalore is Vice President and Economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was Consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.

Copyright © 2012 Asha Bangalore

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

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