Is Italy Following the Footsteps of Greece? Does Italy or Germany Exit the Eurozone First?

As I watch the implosion of Greece, with shops closing everywhere and GDP plunging like a rock, I cannot help but wonder if we are witnessing the start of a similar trend in Italy.

To be sure, Italy has a manufacturing base that Greece does not have, but retail aspects and shop closings in Rome as compared to Athens seems rather similar.

If that sounds far-fetched, please consider Summer of gloom for crisis-hit Rome shops
It is not just stifling summer heat that is keeping shoppers at bay on Rome's Via del Corso: as the economic crisis hits locals and tourists alike, many shops have little choice but to close for good.

The few people around seem to ziz zag from shop to shop, seeking relief from the heat in air-conditioned outlets and leaving behind frustrated shop assistants who struggle to sell anything despite discounts of up to 80 percent.

"The crisis has hit everyone," sighed one empty-handed customer, while shopkeepers up and down the street whiled away their time folding and re-folding piles of brightly coloured T-shirts and stylish outfits.

"The sales have not gone well," said clothes shop manager Fabio Anticoli. While the eternal city usually draws tourists from all over the world who spend their cash on Italian designs, "this year, it's an impoverished tourism."

The sales have gone "very badly" compared with 2011 according to the shopkeepers' association Confesercenti, which reports a 20 percent drop in turnover in central Rome, a figure that rises to 40 percent in outer suburbs.

Lina Rocchi, a lingerie shop founded in 1938, closed down and left a sign that read "80 years, three generations, a story comes to an end."

"1,500 shops in Rome have already closed their doors for good since the start of 2012, and the figure might rise to 2,500 by the end of the year," said the association's head Valter Giammaria.

According to a Confcommercio report, 80 percent of supermarkets and restaurants and more than 50 percent of bars are staying open this week despite a holiday on Wednesday because of the financial crisis.
Same Ordeals as Greece

The BBC reports Italy GDP Drops 4th Consecutive Quarter
Italy's GDP fell for the fourth quarter in a row, preliminary figures showed. Compared with a year earlier, growth slumped by 2.5%, Istat said.

Investors are worried Italy - the eurozone's third biggest economy - may be next in line to suffer the same ordeals that have hit Greece, Portugal and now Spain.

'No sign of change' from recession

Italy's government has the biggest debt burden of any of the major eurozone countries at 123% of GDP, which makes it particularly susceptible to a loss of market confidence - something that would make it impossible for the government to roll over its debts as they come due for payment.

Despite the austerity measures investors have continued to dump Italian sovereign bonds, which have pushed their yields close to unsustainable levels as markets fear a breakdown of the euro.

Italian business confidence fell last month, as company executives are increasingly pessimistic over the country's economic prospects and expect the recession to worsen in coming months.

"There is no sign of any change of trend for Italy," said Annamaria Grimaldi, an analyst at Intesa Sanpaolo.
Italy Manufacturing PMI

Please consider the Markit/ADACI Italy Manufacturing PMI® 
Key points:

  • Rate of job losses sharpest since October 2009
  • Output falls at sharp pace unchanged since
  • June
  • Input prices drop at fastest rate in three years

Manufacturers in Italy continued to face a challenging operating environment at the start of the third quarter. A further contraction in demand led to lower output levels and the sharpest reduction in employment for 33 months, with a sharp and accelerated decrease in backlogs of work underlining the degree of excess capacity in the sector.

The seasonally adjusted Markit/ADACI Purchasing Managers’ Index® (PMI®) – a composite indicator designed to provide a single-figure snapshot of manufacturing performance – dipped to a three month low of 44.3 in July, down from June’s reading of 44.6. The headline index has posted below the neutral mark of 50.0 – signalling deteriorating business conditions – throughout the past year, and was below the average recorded over the second quarter as a whole.

July saw output levels at manufacturers in Italy fall markedly, and at a rate that was equal to that registered in the preceding survey period. The month-on-month decrease in goods production was the eleventh in the past year.
Markit/ADACI Italy Services PMI®

Markit reports Italy Service Sector New Work Drops at Fastest Rate Since March 2009
Key points:

  • Activity falls markedly as a result of accelerated decline in new business
  • 12-month outlook turns negative for first time in series history
  • Rate of job shedding fastest for three months


Conditions across Italy’s service sector took a turn for the worse in July, as incoming new business fell at the fastest rate since March 2009. Activity and
employment both dropped as a result, and for the first time since the launch of the survey in January 1998 firms generally expected output to be lower in a year’s time than current levels. Another negative development for businesses was a slight rise input price inflation from June’s seven-month low.

Outstanding business at services firms was further reduced during the latest survey period, extending the current sequence of decline to 17 months. Moreover, the overall rate of depletion quickened to the fastest since September 2009. Weakness in new business inflows was the most frequently cited reason for lower backlogs.


Phil Smith, economist at Markit and author of the Italy Services PMI® said:

"July PMI data pointed to recession in Italy’s service sector deepening at the start of the third quarter. New business intakes fell at a sharp monthly rate that has been exceeded only four times over the series history, all of which occurred around the height of the global financial crisis. Furthermore, data on expectations showed sentiment at a record low, and gave no impression of an impending recovery."

“Not only did July see a further deterioration on the demand front, but input cost inflation also picked up from June’s recent low. This placed greater pressure on service providers to reduce their overheads, with a solid and accelerated decrease in employment levels one outcome. At the same time, backlogs of work were still reduced at a marked pace, suggesting yet more scope for job cuts.”
Difference Between Italy and Greece

The difference between Italy and Greece is certainly not the direction of the economy. Rather the difference is in magnitude.

Certainly, Greece has imploded at a far faster rate than Italy, but the latest ISM numbers from Italy, both services and manufacturing have been nothing short of horrendous.

Moreover, there is absolutely no reason to expect economic conditions in Italy to get any better.

Does Italy or Germany Exit the Eurozone First?

There is one crucial difference between Italy and Greece: Italy is without a doubt too big to bail. Moreover, German citizens would not be willing to try, even if chancellor Angela Merkel was willing.

That begs the question, does Italy or Germany exit the eurozone first?

I suspect Italy leaves first. Although the answer is unclear, timing is very important. Indeed, the value of the euro vs. the US dollar is very likely dependent on whether Germany remains in the union.

Those wondering why the euro has been drifting nowhere recently just might ponder that rationale.

Regardless, one thing is clear, and that is either Italy or Germany (or perhaps both) is eurozone "burnt toast".

Mike "Mish" Shedlock
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