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Subsiding of Italian Interest Rates A Leap of Economic Faith

Italy has its first unity government since the end of the Second World War but its economic options are more constricted.
By Amiel Ungar
First Publish: 11/11/2011, 3:42 AM

The International Monetary Fund demanded clarity from Italy on the political front. It appears that clarity is on the way in the form of a unity government headed by respected economist Mario Monti. If a unity government emerges, this will corroborate those who believe that the current European crisis is the worst crisis to hit Europe in the postwar period.

The last time Italy had a unity government was precisely in the period from 1944-1947 (when the pro-Soviet Communist and Socialist parties left or were forced out of the government as Cold War tensions increased). In the 1980s, in the face of Red Brigade Terror, the Communists supported a Christian Democratic coalition from the outside. This worked under the formula of non sfiducia, meaning they would not vote no confidence and thus would prop up the government.

The temporary euphoria about the change in the political leadership has served as a crash cart for the Italian patient that was almost pronounced economically on life support once interest rates exceeded 7%, a level that is considered unsustainable. Interest rates on 10 year bonds have now pulled back to 6.2% and Italy, to the surprise of many observers, was able to peddle its short-term debt.

As we have seen throughout this entire crisis. periods of seeming recuperation are followed by a sharp relapse if investors come to the conclusion that they have been handed mere window dressing.

In comparing the postwar Italian miracle with the current situation, there are things that cannot be replicated. After the war, Italy started on the bottom rung of the ladder but could start its economic recovery with labor intensive industries such as textiles and shipbuilding.

At that time the Far East was not part of the industrialized world and Eastern Europe was cut off by the Cold War.

Italy will get a good deal of cash from invisibles such as tourism and there are areas such as tiles and design where Italy has secured generations of preeminence. However, now because of a high euro and the rise of industrializing nations in Asia, an attempt to reclaim traditional industries will not work.

Millions of Italians migrated during the time of the miracle and found jobs in France and Germany, but particularly in Switzerland. The remittances sent home also helped fuel the Italian economy as did the movement of workers from the South to North within Italy.

Now these countries that once imported labor have unemployment problems of their own, or as in the case of Switzerland, are awash with foreign and cheaper labor.

The United States, as the Republican candidates debate, will not bail out Europe and there is no one to pump in investment via a Marshall Plan as occurred after the war.

As long as the price of the euro is high, it is hard to see Italy competing effectively against Southeast Asia. Germany, that calls the financial tune within the European Union, is not interested in cheapening the currency.

When Germany joined the euro, its politicians promised the citizenry that the euro would be as rock solid as the deutsche mark. Debasing the currency would now be considered a major breach of faith.