Too Big To Bail, Too Big To Jail: Italy In Recession With Very Troubled Banks

Italy is back in recession. The pattern of weak growth ever since it joined the Eurozone is easy to spot.

The Telegraph reports Italy Tumbles Into Recession as Eurozone Suffers Slowest Growth Since the Debt Crisis.

Italy has fallen into its third recession in a decade as slumping domestic demand caused the economy to shrink.

GDP fell by 0.2pc in the final three months of 2018, following a 0.1pc decline in the third quarter of the year. That met the usual definition of a recession - two consecutive quarters of contraction. [Mish note: I see only two instance of back-to-back declines but there are better definitions.]

The eurozone as a whole expanded by 0.2pc, the same pace as in the previous quarter. Compared with the final quarter of 2017, eurozone GDP rose by 1.2pc, its weakest 12-month performance since the 2012-13 recession that accompanied the sovereign debt crisis.

“We expect the European Central Bank to revise down its GDP forecasts, of 1.7pc growth this year and next, in March and to make clear that it does not expect to raise interest rates until next year at the earliest.” German officials have already cut their own forecasts of national growth from 1.8pc for 2019 to just 1pc.

Don't Blame Austerity

Five Reasons

Please consider Five reasons Why Italy is Back in Recession - and How it Could Blow Up the Eurozone

  1. Global Economic Slowdown: The world economy seems to be at a tipping point. After a long, slow recovery from the financial crisis growth was back on track a year ago, yet momentum has faded. Fears now abound. China has slowed. The US has peaked.
  2. Confidence: The combination of political turmoil, weak international growth, worries over debts and the long-term travails of Italy’s banks has left the country’s businesses on edge. Investment remains is muted as companies hold off committing to any big financial decisions.
  3. Debt: Italy’s government has debts of more than 130pc of GDP - a tottering pile that limits its spending power, threatens higher taxes on workers and businesses, and risks destabilizing financial markets. Countries do not rack up debts like this by accident: borrowing and spending is a tried and tested way to pep up growth. However, at this level, debt is now a constraint on the economy.
  4. Banks: The banking crisis began a decade ago, but Italy’s lenders were never fully cleaned up.
  5. Permanent Crisis: Italy’s eternally slow growth rate indicates there are very fundamental problems with the structure of its economy. Yet successive governments have also struggled to make any of the necessary reforms, despite constant urging from economists including those at the European Central Bank. The economy is heavily regulated, with access to many professions tightly limited and an inflexible jobs market.
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