Europe’s 2013 will bring more of the same

As I covered yesterday the most likely approach for the political campaign of a returning Silvio Berlusconi, amongst others, was to play on the fact that under Mario Monti’s technocratic leadership the country had economically worsened. It certainly didn’t take long for him to show his colours:

“The Monti government has followed the Germano-centric policies which Europe has tried to impose on other states and it has created a crisis situation much worse than where we were when we were in government,” Berlusconi said in an interview on his own Canale 5 television network.

He dismissed the sharp drop on financial markets which followed news of his return, saying the main gauge of investor trust in Italy, the spread between Italian bonds and their safer German counterparts, was “a con”.

He also accused Germany of deliberately speculating on the euro zone debt crisis to favor its banks and drive down its own borrowing costs.

He won’t be alone and as Ambrose Evans-Pritchard pointed out yesterday an anti-euro/anti-austerity campaign isn’t just some political fantasy. Italy has an economic structure which could easily convert back to the Lire and take full advantage of a lower currency without causing the country too much up-front damage. If there was a country that I saw as a real “convertibility risk” Italy would certainly be up there.

There is rumour that Mr Monti is now looking to run for PM in one of the centrist parties, but at this stage it is just that, a rumour. Whether or not Mr Monti could take the leap is yet to be seen, but just in case Berlusconi is certainly front-loading the dirt.

Although the focus this week is on the political goings-on in the Italian parliament the country is by no means my greatest concern. I’m actually more concerned about The Netherlands than I am Italy at this stage. Of course the front-runners remain Greece, Portugal, Cyprus and Spain because even though we’ve seen ever-larger emergency measures applied to these countries in order to maintain financial market stability, the same can’t be said for the non-financial private sectors of these countries which continue to deteriorate.

If you need an example of what I’m talking about you need look no further than last night’s release of the Tinsa Spanish house price index.

The General IMIE index fell by 12.3% year-on-year in November, very similar to the previous month, to a level of 1514 points. The accumulated decline from the top of the market in December 2007 was 33.7%.

By area, the “Mediterranean Coast” once again occupied first place with a year-on-year decline of 15.2%, closely followed by “Metropolitan Areas” with 15.1% and “Capitals and Major Cities”, where house prices fell by 14.4%, completing the segments with declines above the market average.

Below average were the “Balearic and Canary Islands” with a year-on-year decline of 9%, and “Other Municipalities” – those not included in the other segments – with a decline of 8% compared to the same month the previous year.

In terms of cumulative falls by area since the market reached its peak, the “Mediterranean Coast” broke new ground in November reaching 41%; followed by “Capitals and Major Cities” with 37.3%, “Metropolitan Areas” with 37%, “Other Municipalities” with 27.3% and lastly “Balearic and Canary Islands” with 26.7%.

So as you can see the loss of private sector wealth continues at pace, with losses in some areas now over 40% from peak. The Catalonian region has been hardest hit and I ‘ve noted previously that I am sure this is adding to the political tension in the region.  The continuation of falls in house prices will be flowing through to further bad debts in the banking system which is already at an all time record and approaching 11% or €200bn. Spain has set up a bad bank, which I covered here, but as I said in that post asset transferred in the process will set a new, and lower, floor price which is likely to have a further negative impact on the broader market and the banking system.

In 2013 the Greek, Portuguese, Cypriot and Spanish governments have all promised further fiscal tightening. Portugal especially is about to launch a program that the opposition has called a ‘fiscal nuclear bomb’ which is very likely to see a swift rise in economic retrenchment in the new year.

In short, even though the financial markets appear to have found a pre-Christmas calm on better German confidence, the economic and political risks remain. I expect 2013 to be just as volatile, if not more so, than 2012.

Full Tinsa report below.


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  1. I’ve been searching around in the bottom of the desk draw for some loose change to buy some of the Mediterranean Coast stuff. Maybe if I wait a bit longer.

    I hadn’t thought about Italy leaving the Euro. It sure looks, economically, to be in the ‘sweet spot’ for doing so although I doubt it would do a lot for political stability?

    • So have we! The Algarve looks to be the target for us at this stage…….Bring back the Escudo and funds will gush into Portugal…..

    • Flawse

      Sardina might be a goer, part of Italy, but suffering a real drain. High unemployment, very poor demographics with university graduate children reliant on parents EU pensions. Suggest the southern side though as I believe the north gets very cold in winter.

  2. Sooner or later all the PIIGS will fail and possibly leave the Euro.

    Political powers are losing power and confidence from their people. This is a normal cycle in social movements. People are already at breaking point and will reach out to anything if they think it could work, no matter how bad that anything is.

    • Others may go first but I’m still looking at France to be the really big smash!
      Not a forecast just an opinion!!!!

  3. And it seems from Target 2 balances that a lot of Italians have got their money out of Italian banks and into German banks, meaning they can probably duck any devaluation in Italy resulting from conversion of bank balances and debts.

  4. Berlusconi saves the Euro? A fitting finale for the tragicomic farce that the Euro spectacle has become. I for one would applaud such a final act.