Sunday, July 3, 2016

Italy: story of a crisis

I left Italy in the Summer of 2014.

I should say: I escaped from Italy in 2014. Maybe I am part of the "brain drain"since I have a degree and experience in the space business. But the point here is that I had a permanent job in Italy. I was not unemployed. I was not "young" (I was 40 years old), I had a family, a house without a mortgage, many good friends and a much-loved elederly father. If I had failed abroad, I had no parents to come back to. And I was asking my kid and my wife to learn a new language, find new friends, get used to new habits.

You know, I want to speak about economics applied to everyday life, and I have to start from the life of a guy I know best than anybody else: myself :-)

Differently from those who move from one country to another simply following the decisions of their companies, so their company is always the same, I was leaving a giant of the aerospace industry to move to another place.
So, to leave all these certainties, I had to had a very strong motivation.

Where was this motivation coming from?

The motivation in my case was the firm belief that Italy sooner or later would collapse. And that the labor crisis was eating my salary, the ability of my wife to find a better job. I wanted to have a better wage, work in a multicultural environmnent, count on my strength and skills to improve my life quality. I wanted to have extra time for myself, to study economics and finance to take care of my future retirement. To have extra time for studying was imperative: it makes no sense to give all your time/life to your company, or to find a second job for a living because money is never enough and you have to "downsize"; I simply HATE the idea of downsizing.

The main point of course is that had not Italy been in crisis, and had I not the strong belief that the crisis would have gone deeper and deepert, I would have never left my Country.

So, why is Italy on crisis? and like Italy, Spain, Portugal, France, not to mention Greece, which is only a shadow of the country it used to be before 2009?

There are many reasons, of course: some blame Italians for being too lazy, for having too many unproductive civil servants, for not investing enough in new technologies, for having a labor force that is enslaved to unions, for having too many and too small enterprises. Not to mention that they say Italians have mafia-spaghetti-mandolino issues (I have not seen a mandolino in my whole life, but let's make Americans happy with their classic views of Italy), they are corrupted, their justice does not work, their politicians are ineffective and ignorant.

This is what you typically find out if you read Italian press. We have to acknowledge Italians for being absolutely self-racist.

I have worked with many engineers coming from different countries, I have met many people in Europe and I think that Italians, on average, have the strenghts and weaknesses like any other other people. Not the SAME weaknesses and strenghts, of course.
But this is a personal consideration. I may be wrong. So let's use another metric.
Since so many countries are struggling in Europe, how is it possible that we share the same weaknesses, from Ireland to Finland to Italy to Greece? And how's that possible that 15 years ago all of us were in a better shape?

To me the answer is simple: the euro. The currency euro.

You see, a currency is not only the means you use to pay for your groceries or the gasoline. Those who control the currency, control an important part of our freedom and the range of our choices.

Let's start with two countries, that we call I and G. Let's suppose that they produce the same products, for example automobiles. In a free currency market, if I has a high rate of inflation than G, then the same product will cost more. In this situation, less people abroad will ask for the cars manufactured by I, and more people abroad will ask for cars made by G.

So, more people will be willing to pay cars, that are priced with G-currency. If demand is raising, G-currency will appreciate with respect to I-currency. As a consequence, G-cars will become more expensive than I-cars. There is an automatic balancing system, obtainted through the free currency exchange market.

When a currency is fixed between I and G, this balancing system does not work any longer. Country G will not see its currency, the G-currency, appreciate, if many people buy its cars,  and its cars will always cost less! for year and years running. At that point, also people living in I will buy only G-cars, because they will become cheaper and cheaper, year after year. And I will get de-industrialised because nobody will buy I-cars. Unemployment will raise. Taxation weight will raise since the country I will see the return from taxes collapse due to the crisis. Banks will see bad loans skyrocket  because unemployed people will not have money enough to pay for the mortgage. Therefore, real estate market will collapse.
Country I could, in principle, save the distressed banks and companies by increasing the public debt, but, maybe, country I is part of a political club that prevents I from doing that. If I want to get money, I must approve "structural reforms", that is cuts to welfare, cuts to education, cuts over cuts. Only at that point, country I has the right to ask for loans to the IMF, International Monetary Found, of course by paying interests on those loans.
In addition to that, also if country I could start spending public money to help its citizens get through the bad moment, the citizens would start again to buy G's stuff, because G's stuff is still more competitive, due to the mechanisms explained above.

Whatever you do, you end up badly.

Let's suppose that I is Italy, and G is Germany. But I could also be France, Spain, Portugal or Greece.

You do not believe me? look at this graph.

This graph shows an interesting point: starting from 1999 (when euro was born) Germany's trade balance exploded while the trade balance of Greece, Ireland, Portugal, Spain and Italy collapsed.

NOTE: the current account, in the picture, comprises the trade balance, which is by far the most important contributor to the current account. 

If you want to have a better insight, there it is.

So maybe now I have provided a good explanation of the reason I left Italy.

1. Italy is part of the eurozone
2. Italy saw its manufacuring industry collapse
3. The salaries were decreasing and the taxes, for those who still had a job, were raising
4. The real estate market was collapsing, and the welfare was getting worse and worse
5. Unemployment was raising
6. I was working in the manufacturing sector, in a company owned largely by a French multinational. So, they had to focus on investments in France, not in Italy. It was a sensible approach.
7. They had started sending me (and many other colleagues of mine) here and there, wherever there was a bit of demand for an engineer, even if I was overqualified. I started also working in night shifts. I was just a "hole filler". My company could do nothing else to prevent that. We were overstaffed for the amount of work we had been given for the following two years.
8. Should Italy decide to leave the eurozone, the financial markets would punish my Country by selling billions of Government securities all at once, sending Italy to bankrupt. Technically, this is called default. It already happened in 2011, and we know what happened afterwards. Three prime ministers in 5 years, and none of them had been elected. This is called the end of democracy.

In a nut shell: due to the euro constraints, the situation cannot improve for none of the countries depicted above, including France and Finland.

It is not my opinion. I wish it was my opinion.

It is mathematics. Like two plus two equals four.

And now? well, now the situation has vastly improved. I am still trying to sell my house in Italy, since the real estate market is ...well, distressed to use an euphemism. I will buy a house in the Netherlands when times are mature enough.
I think that had I started studying economics five years before, I would have made completely different choices. It is my only, big regret. It is never too late, I say to myself, and I always foster people who find themselves uneasy in their home country, to leave and face new challenges elsewhere. 

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