I have minimal confidence that governments can turn this around within the confines of the eurozone project. You might be surprised though that I feel more bullish! Why? Both Dylan [Grice] and I have come to the view that the ECB will be forced, by events, to monetise debt in the GIIPS and beyond. And if investors believe the governments in Spain and Italy are bust, then Germany, France, and not forgetting the UK and US, are far, far worse.
We did say ‘relatively’.
Edwards reckons the looming threat of a euro break-up will force the ECB to lose its “monetary virginity”, a phrase coined by economist Paul de Grauwe, and begin printing money. Rudolf Von Havenstein, president of the Reichsbank in the early 1920s, who kept printing because he was scared of the mass unemployment that would result if he stopped, should serve as a fitting precedent.
Ironically though the Germans are unlikely to back such a move. And in fact, if the ECB does join the QE party, the bigger question will be if Germany will leave the eurozone due to this “monetary debauchery”.
What about the Italians then? Well, whatever the bond markets say, on many measures Italian public sector debt fares well on cross-country comparisons, Edwards said. In other words, if Italy is insolvent, what are France and Germany?
Source: Société Générale
The main variable that encapsulates the depth of Italy’s economic problems is GDP per Capita, Edwards says. This ratio is lower today than it was a decade ago, and with near-zero growth Italy simply cannot grow its way out of its debts: