All Roads Lead to Rome, Part I

Michael McTague  |

Image: Temple of Saturn, Roman Forum. Source: Andreas Tille / Encyclopaedia Britannica / GNU Free Documentation License Version 1.2

Beyond the coronavirus financial crisis, all countries need to protect their economies from further damage. Our new series concerns Italy, a major member of the euro zone that has also suffered mightily this year. Italy’s economy is our focus. The euro zone suffers from slow growth. Long before the coronavirus cut deeply into profits, the wealth centers on the continent — Germany and France — were crawling along. Careful observers will note, however, that Italy has been moving even more slowly for several years. The Myth Buster has taken on a few challenges inside the massive inner circle of European wealth. Poky economic gains prove truly annoying and just will not go away. Apart from Germany, the hotter engine in the group that slowed down as 2019 ended, the other nation states drag along in rebuilding financial strength. For years, Spain, Portugal, Ireland and even France have been happy to have Germany take the lead in making everyone rich.

And why wouldn’t Germany generate wealth? It looks over a massive market at its doorstep, all using the same currency, more sovereign than the pound sterling, shining more brightly than the crowns of European royalty. (The traditional currencies of Denmark, Sweden, Norway and Iceland are named for crowns.)

This brings us back to Italy, a large country (population nearly 61,000,000), which stands out like a taller hurdle in a track and field event. A government that loves spending holds back a booming tourist industry, deflated by COVID-19. As the economy sputters, a pattern crossing many consecutive months, the government wants to dole out money to willing voters. The recent pandemic only increases this urge. Italy needs a cash injection more than any other euro zone country. So much for austerity — a euro zone catchword — and say goodbye to letting the economy heal itself by allowing consumers to save money and buy things.

Out of step with most of its neighbors, Italy is big enough to shake off the advice of Germany or France and increase spending on social programs as the tax account shrinks. For example, pre-virus budget policies called for increased safety-net spending while raising the deficit ceiling. The total Spring virus shutdown cuts even more deeply into the nation’s thin financial resources.

The trouble derives from poor fundamentals. If this were a baseball game, their score would be no runs, no hits and many errors. The economy grew at just 0.3% in 2019. Public debt stands at 131% of GDP according to Focus Economics. Not surprisingly, consumer confidence is down. The word “stagnation” comes up frequently to characterize Italy’s financial prospects. Even the winged chariots on top of the Victor Emmanuel II monument aren’t moving forward.

Italy enjoys a number of business strengths. The birthplace of the Renaissance does well making luxury goods. Of course, when your neighbors and trading partners experience snail’s pace financial movement and are also battling a pandemic, luxury creeps along. Airlines stand still. Tourism sags if consumers elsewhere worry about paying for the basics. Italy needs money to flow freely in all countries. Its biggest exports in addition to luxury goods include mechanical machinery and equipment, which accounts for 24% of total outgoing products. Fancy cars and some more modest auto models account for about 7% of exports. Big pharmaceutical companies and electronics rack up a combined total of 10% of exports.

The biggest Italian-based companies are Enel, Intesa SanPaolo, Ferrari, Assicurazioni Generali and Unicredit. The FTSE MIB, the benchmark stock market index for the Borsa Italiana, the Italian national stock exchange, had a good year in 2019 in terms of stock appreciation. Enel, the giant utility company with a $77 billion market capitalization, went up 38% for the year. Enel is the largest utility in Europe and the government owns a sizeable chunk. Ferrari certainly deserves honorable mention for having the best ticker symbol (RACE). It also sports a market capitalization of $41 billion, topping international rivals General Motors and trouble-ridden Ford.

It is difficult to scale back an economy that is largely built on expensive goods and tourism. In our last Myth Buster series, we looked at economies —Russia, Saudi Arabia, Nigeria — that put too much stress on natural resources. Manufacturing and services would help mightily. Italy is in a different pickle. Florence could be annexed by the United States; its pre-virus residents were mostly third-year college students from American colleges. Expensive clothing and sports cars are fine, but they lead to a big financial problem. The country begins to think in terms of luxury. Goods are sold to wealthy people for whom money flows easily. This may in part explain why Italy’s government also loves to spend — even if it does not have money on hand.

Readers may balk and think that the government is smarter than that. I'd ask you to consider the wave of austerity that swept across the euro zone a few years ago. Greece had its neck stuck out, and it nearly reached the chopping block when it defaulted. Germany and France have encouraged their neighbors to reduce spending, but Italy is not on board with financial dieting.

The fundamentals stand against a happy ending. High unemployment (9.7%), large debt, low consumer confidence and the after effects of the pandemic make it difficult to craft a solution. Consumer spending is trapped by a shortage of wages. Tax revenue is down because people are not spending and not earning. Tax outflow rises to stem the pain of unemployment and to handle the virus. New debt soars.

This series focuses on Italy, a significant euro zone country. Hence the title, “All Roads Lead to Rome.” Stay tuned. Beneath an attractive stock market performance in 2019 lies long-term stagnation and an acida future. Next month continues the investigation.

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Michael McTague, Ph.D. is Executive Vice President at Able Global Partners in New York, a private equity firm.

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