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FX COLUMN-Italy: no bella figura without a lower euro
August 29, 2014 / 12:05 PM / 3 years ago

FX COLUMN-Italy: no bella figura without a lower euro

-- Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own --

By Neal Kimberley

LONDON, Aug 29 (Reuters) - If Italy is ever going to recapture its glory days, it needs an even weaker euro and, given its weight in the euro zone, it might just get it.

Forex traders may logically react to the gravity of Italy’s economic and fiscal plight by selling the euro.

The bloc’s third largest economy is in recession after a 0.2 percent second-quarter contraction, and in deflation. Unemployment rose to 12.6 percent in July. [

Public debt, at around 133 percent, is the second highest in the euro zone after Greece. One of the world’s most sluggish economies for the past two decades, output is lower in inflation adjusted terms than it was in 2000.

Graphic on Italy's real GDP:

Graphic on Italy's Debt/GDP:

Graphic on Italy’s unemployment and inflation data:

Italy needs all the help it can get.

The outlook is darkening. Economy Minister Pier Carlo Padoan said in a newspaper interview on Wednesday the growth outlook would have to be cut and called for a European vision for reforms.

Consumer morale is again on the slide, falling for the third month in a row in August. The same survey showed Italians expected unemployment to continue rising, and saw no pick-up in prices.

No wonder Italian consumer spending continues sluggish, with wallets kept tight shut as people worry about the security of employment, but are equally convinced they can delay purchases as prices are not going to rise anyway.

An annual wage inflation rate in Italy at its lowest since 1982, is not going to alter popular opinion.

A yet weaker euro might, by boosting Italian exporter competitiveness, help job creation and alter expectations on prices through increased imported inflation.

A weaker currency, sparking imported inflation, would also help cut Italy’s debt by eroding its real value.

Italy has endured the opposite.

Italy’s real broad effective exchange rate, i.e. adjusted for inflation, rose to above 100 from a low of 91 in 2000, before falling back to 99 at the start of 2014.

Graphic on Italy's real broad effective exchange rate:

Italy’s miserable economic performance since it joined the euro must, at least in part, be attributable to its adoption of a currency somewhat harder than its predecessor, the lira.

It’s hard not to conclude that if Italy’s economy is ever to cut “una bella figura” again, it needs an even weaker euro. The intractability of Italy’s plight, materially important to the euro zone, suggests that outcome is likely.

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