Pain and Recovery in Southern Europe
The economic problems in southern Europe are deep and painful, but they are not unsolvable. Some of them are already beginning to mend. A case in point: Italy, which has started to grow again after enduring a nasty recession.
Then there’s Greece, which looks like it’s headed for a new round of trouble. Although its crushing debt and crippling unemployment are economic maladies, the fixes -- or lack thereof -- remain political.
It always helps to get out from under the fluorescent lights for a first-hand view of a local economy. I did just that while attending a conference and other events last week in southern Europe. What follows are what I heard and saw.
Greece, obviously, remains a country in deep financial distress. It has the biggest budget deficit in Europe, at 7.2 percent of gross domestic product. It pays some of the highest interest rates in the world on its debt. It isn’t so much that Puerto Rico is America’s Greece, but rather that Greece is Europe’s Puerto Rico; it was given lots of credit on favorable terms during the good times, but now the bill has come due. It can neither repay nor can it default via bankruptcy and start anew. The Greeks I spoke with universally blame Germany for their country’s inability to get out from under the debt burden. They have a point, though Greece itself is far from blameless.
I encountered two surprises in Greece, one rather depressing, the other full of promise. First, six years into the debt crisis, very little progress has been made toward economic reform. The private sector suffers from a lack of growth; the public sector suffers from a lack of revenue because of endemic tax avoidance compounded by that lack of growth.
The second was the energy and drive of the country’s entrepreneurial class. The Greece portrayed by its detractors -- a nation of chain smoking, Ouzo-drinking layabouts -- is a cliche that deserves a trip to the rubbish heap. The people I met -- admittedly not a true cross-section -- were driven, intelligent and excited about what the future holds, despite the many challenges facing the country.
But until Greece’s debt crisis is resolved, which isn’t made any easier by its dysfunctional government, no end to its economic woes is in sight. That in turn means that Greece is likely to be a drag on the southern European economy for the foreseeable future.
Italy is a somewhat brighter picture. Europe’s fourth-largest economy (after Germany, the U.K. and France -- and ahead of Russia), at more than $2.1 trillion, is almost 3.5 percent of the global economy. And its economy is growing again, although GDP still is a quarter-trillion dollars below its 2008 high.
The economy of north Italy is diversified and dominated by small and midsize closely held companies, many of them focused on fashionable, high-quality consumer goods (the south tends to be agrarian and dependent on government subsidies), according to the CIA World Factbook. This commercial base is a source of stability, but also a significant constraint. Many companies have problems with succession, low productivity and limited access to capital. Although cities such as Rome and other tourist destinations are thriving, the rest of the country has had little or no growth, with per capita GDP stuck at 1999 levels.
Like Greece, Italy also has a thriving cash economy, much of it aimed at avoiding taxes. But it is nowhere near the high art it is in Greece. Credit cards are welcome everywhere, and I hardly saw any signs at retailers offering discounts for cash. Electronic transactions are the enemy of the black market.
As recently as 2006, both Italy and Greece had a debt-to-GDP ratio of about 100 percent. Since the financial crisis, Italy’s ratio rose to 130 percent, while that of Greece has soared to 180 percent. (For some perspective, the average in the European Union is about 87 percent, while the U.S. is 104 percent.)
At some point, debt becomes a drag on growth, as economists Carmen Reinhart and Kenneth Rogoff wrote in their book, "This Time Is Different: Eight Centuries of Financial Folly." Greece seems to be at that point. Is Italy? Maybe. We’ll find out.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
To contact the author of this story:
Barry Ritholtz at email@example.com
To contact the editor responsible for this story:
James Greiff at firstname.lastname@example.org