The long and short of it is: Italians are poorer now than they were in 2004 when they adopted the Euro, and their annual GDP growth is struggling to reach 1 percent. This is apparent in the declining capital investment in business and infrastructure. And points out why fewer Italians tell pollsters the euro is a good thing.
As one Venetian restaurant owner lamented to us years ago, “The American do not come anymore because of the Euro, and everything I buy costs more.”
Recent opinion polls show a steady decline in support of the Euro by Italians. Now, suddenly, a Eurosceptic consortium of parties may take control of the Italian Parliament, and yesterday, this seemed to come as a surprise to investors. When one considers what occurred in Britain two years ago nearly to the day, Italy’s exit from the German dominated Euro is a real possibility.
Italy’s 5-Star movement, which wants to dump the euro through a referendum, recently has been surging in opinion polls, getting as much as a third of the vote in a March Corriere Della Sera poll. The anti-European Union Northern League got another 12 or so percent – and there are others.
Although psychologically, change is hard for European. But they are human too…when a crisis hits, they will make changes. The current situation may appear as a “crisis”, but there is little palpable pain now. And, the ultimate move for Italy, exiting the Euro is more likely at a slow boil, especially because the economy is still growing. However, the slightest slide into recession may be the stimulus needed for action.
In the meantime, it is not safe to be an investor in European equities or bonds. Yesterday’s realization hit Italian bonds hard dropping them the most in 25 years. A better approach to Europe might be to wait until complacency reestablishes itself and volatility declines, then short Italian debt and wait for the next “reality moment”.