June 14, 2012

Italy’s EU ‘Death Spiral’

By Don Kirk in Economics, Socialism's "intellectual suicide"

Reporting from Italy where he’s been for the past three weeks–nice work, if you can get it–Doyle McManus has a column in today’s Los Angeles Times reporting on the economy in Italy. Clearly, not good news. Unemployment is rising to double digits and interest rates are rising as well. McManus reports that austerity in Italy is publicly more acceptable to Italians than it is to Greeks in Greece, but he should wait to report on actual polling data before launching his unofficial man-in-the-street report.

An actual poll would measure Italian sentiment after Italians learned about their recent role in bailing out debt-overloaded Spanish banks. Splitting metaphors, let’s see if we can say this succinctly, crediting the irrepressible Nigel Farage when he addressed this issue in a speech from the floor at the EU parliament yesterday.

Spain, like Greece, is in a full depression, while Italy is in a recession. Spanish banks have massive amounts of unpaid debt in their portfolios, the legacy of the boom and bust in Spanish real estate a few years ago. Since no private investor wants anything to do with busted Spanish banks, to re-capitalize the banks the European Union has promised to lend the Spanish government about $125 billion dollars. (cough, cough).

“Lend,” as in more debt! The commitment by the EU means that each member of the EU has to pay its share of the loan to Spain’s government, which will pass on the loan proceeds to the broken Spanish banks. Italy’s ‘share’ of the loan is 20%. The math is fairly easy. Busted Italy with no money and already too much debt has to borrow another $25 billion dollars to lend to busted Spain which is also swamped with too much debt. Italy’s cost of borrowing is roughly 5%, and it will lend to Spain at 3%, so exactly who pays the difference, and who pays off the original $25 billion?

Italian taxpayers! For private Spanish banks! The same private banks that Jonathan Weil in today’s Bloomberg Op-Ed pointed out have “cooked the books” for more than a decade, with EU blessing! Why did the EU permit the private Spanish banks to ‘cook’ the books, in violation of its own rules and regulations of European banks? Because the dishonest accounting was done in the name of ‘counter-cyclical’ planning, which just happns to be, coincidentally perhaps, a key feature of the arguments for Keynesian/Fabian Socialism economics.

But, but, who pays off the Spanish loan to Spanish banks if the banks go broke or are nationalized? Spanish taxpayers, on behalf of crooked Spanish banks!

It is impossible to borrow one’s way out of debt unless the return on the additional debt is greater than its cost. Neither Italy at 5% or Spain at 3% is in any position to afford more debt, since their growth rates (the “return” on the debt) is negative. No one can pay off 5% or even 3% interest with -2% return. The simple math undoes the socialist ideological agenda which argues that debt generates growth. The EU has both Spain and Italy on an economic “death spiral.”