Italy Coasting Through Crisis

09/01/2011 9:11 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

The beaches and cafes are full as imperturbable Italians chat their way through another trial, writes senior editor Igor Greenwald.

The financial crisis caught up with me on my third day in Italy.

Milan’s benchmark stock index had just bounced slightly off a three-year low, but the diner at a nearby restaurant table was not fooled.

One by one, he named some of Europe’s biggest banks, dismissing each with the finality of a coffin maker hammering the last nail. “Société Générale—a disaster,” he pronounced to his companion. “UBS—another disaster. Commerzbank—a disaster.” And so on.

He was an English speaker, of course, probably a financial professional from London. It’s possible that the only Italians in the restaurant besides the staff were the couple accompanying Mrs. Woody Allen.

But the small talk from the auteur’s table was drowned out by verdicts of financial doom: “a disaster…a disaster…a disaster.”

And then I left Rome’s foreign-occupied historic precincts and traveled to some tourist spots preferred by the Italians. And was relieved to discover that the financial panic had not robbed locals of their fatalism, grace, or habit of persevering under trying circumstances.

Italy is a country where seemingly hopeless jams on curving, impossibly narrow roads resolve through patience and skill—without the blaring of horns or gestured insults.

It’s a country where the ubiquitous European Union flag flies from private property as well as public buildings, symbol of popular support for European integration.

It’s a country where small-scale private enterprise thrives side-by-side with the bloated public sector, and where the beaches and cafes are crowded, while bank branches stand unfailingly empty.

Italians are worried, of course. Several told me they’ve foregone the traditional family vacation for the last few years. Few think the scandal-plagued government can spark growth after decades of economic stagnation.

But I could find no one who expects the Eurozone to break up, and no support for a return to the old, frequently devalued lira currency, the surest way to revive growth.

Italy is stuck with a currency that makes it too expensive for German tourists and domestic exporters, but there’s been no blaring of the horns demanding progress.

Instead, the country’s doing what it does best—getting by.

There are no incensed protesters jamming Italian squares, only children, retirees and lovers sharing gelato cones.

The nightmare scenario is Italy going the way of Greece, into an economic depression that sparks rioting. But Italy is not Greece: it has a much lower budget deficit relative to GDP, more social stability, and a longer history as a key partner in the European project.

A few weeks ago, when speculators were attacking Italy’s bonds, the government unveiled tough austerity plans meant to balance the budget by 2014 to get the European Central Bank to buy its debt on the secondary market.

But now that yields have pulled back, so has the government’s tolerance for pain. The latest revisions to its fiscal plans deep-six a “solidarity” tax surcharge on high earners, and reverse the bulk of the cuts in regional aid. Meanwhile, the ECB keeps buying just enough Italian bonds to hold the wolves at bay, but not so much as to let Rome off the hook on spending cuts.

This is the financial version of Catenaccio, the defensive-minded soccer scheme that is Italy’s contribution to the game’s tactical evolution. The goal of Catenaccio is to prevent goals, and on that score Italy is succeeding.

As in any low-scoring game, the margin for error is slight. But Italy knows how to negotiate tight spots.

As for that litany of financial disasters-in-waiting overheard in Rome ten days ago, US stocks have rallied more than 8% since, while Italy’s have bounced 4%.

It might be only a reprieve. It’s almost certainly not any sort of a turning point. But string enough reprieves along, and you can live pretty well.

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