Matthew Lynn: The Euro Policy Killed Italian Banks
July 22, 2016 (EIRNS)—Matthew Lynn is a financial journalist based in London. He is the author of Bust: Greece, the Euro and the Sovereign Debt Crisis, and he writes adventure thrillers under the name Matt Lynn. He is one among few economists pointing the finger at the euro-induced austerity policy as the cause of the Italian banking crisis.
Writing in his "London Eye" column in Dow Jones’ Marketwatch site July 21, Lynn says that "Italian banks have been managed in a perfectly prudent and sensible manner. The problem is that the economy has got so much smaller. Growth has hit a wall, and it appears impossible to revive it. In 2015, the Italian economy expanded by less than 1%. In fact, Italy’s economy is still 8% smaller than it was before the 2008 crash, and no bigger than it was back in 1999 when it joined the euro.
"It is not hard to work out what is going on. When the economy is that sluggish, lots of small companies struggle to pay back their debts. Likewise, mortgages turn sour and so do consumer loans. A debt that looked perfectly manageable a decade ago is not going to look so healthy 10 years on when the economy is almost a tenth smaller, unemployment is far higher, and real wages have been falling relentlessly.
"In fact, what Italy has is a euro crisis, not a banking crisis. The single currency has destroyed the competitiveness of what, 20 years ago, was a perfectly healthy manufacturing sector. It has sucked demand out of the economy, and hammed consumer spending.
"It gets worse. Eurozone rules introduced at the start of this year mean bond holders, which in Italy means lots of private investors, have to be ‘bailed-in’ to a rescue. The government cannot simply rescue banks that have run into trouble. It has to make sure that private investors take a hit as well—and since many of those are ordinary savers, that will mean even steeper declines in spending, and leave the economy in even worse shape.
"As any doctor will tell you, unless you get the diagnosis right there is no hope of successful treatment. Right now, the ECB [European Central Bank] and the Eurozone finance ministers are operating as if this were a banking crisis like any other. Fix the banks, stop the irresponsible lending, and everything will be okay again. But that is simply not true.
"Even if the banks are fixed this time around, in a stagnant economy they will just run into trouble again in a few years time. Italy is trapped in the worst of all possible worlds—and it has become a vivid lesson in how dysfunctional the euro has become."