Our country has several features in common with Italy and Spain. But its business model is even more unbalanced.
Italy and Spain, who found it difficult to recover from the 2008 financial crisis, the upheaval in the euro in 2011, and then from the pandemic, are undergoing a new major crisis because of the war in Ukraine. They don’t share the same level of dependency on Russia, but both are having increased structural difficulties, which are contributing to the weakening of Southern Europe.
After having been in the front line of Covid and having recorded a historic recession of 8.8% in 2020, the Italian economy bounced back substantially in 2021. Growth reached 6.7%, driven by export figures that soared to €616 billion.
The invasion of Ukraine has put a sudden stop to this dynamic. Growth might only reach 4.2%, whilst inflation is already over 6%, with the key element being a loss of purchasing power of about €1,000 per household. It is a foregone conclusion that reducing public debt, which reached 150.8% of GDP at the end of 2021, will not be achievable.
Italy is the fourth largest partner of Russia, and its second largest in the EU. Its energy mix is 83% oil, gas and coal, of which 17%, 40% and 50% respectively depend on imports from Russia. Because of close ties made with Moscow since the Cold War, the country also houses 20% of the wealth of the oligarchs targeted by European sanctions.
Italy is held in a vice between the energy crisis and the new rise in interest rates, as shown in the spread over German bonds which rose to over 200 basis points. The Ukrainian conflict is therefore compromising hopes raised by the reconstruction project and is bringing Italy’s weaknesses into the spotlight. Firstly, the population is falling (1.2 children per woman) and ageing (25% of people will be over 65 in 2045), and this is aggravated by the fact that two million young people have left the country since 2008. Secondly, there is under-productivity and insufficient investment and innovation. Thirdly, the government is inefficient and over-indebted. Lastly, the political system is fragile – despite the fact that the duo of Sergio Mattarella and Mario Draghi were returned to power – and there is a rising populist threat.
Spain has also been hit head-on by the bursting of the financial and real estate bubble in 2008, then by the pandemic which paralyzed tourism (12.4% of GDP) and the automobile industry (11% of GDP and 8% of jobs). Recovery levels reached 5.1% in 2021, driven by exports which rose to €317 billion in 2021. But it has been weakened by the consequences of the war in Ukraine.
Spain depends very little on Russia, which supplies only 7.5% of its energy and only takes 0.5% of its exports. But it has become involved in a dangerous power struggle with Algeria which supplies 30% of its gas, because of its support for Morocco in the Western Sahara crisis. Furthermore, it is suffering from the backlash of stagflation which is reaching the Euro zone. Economic activity is 4% below its 2019 level and inflation is approaching 10%, which underlines the handicaps linked to the fragmentation of the manufacturing system, the lack of productivity and innovation, and the dualism of the labor market.
Under pressure from the truck drivers’ strike and the mobilization of entrepreneurs, the government has had no choice but to launch a 16-million-euro aid plan to support the sectors that had been weakened the most, such as transportation and agriculture, as well as households (a 15% rise in the minimum wage, a limit of 2% placed on rent rises, the reintroduction of short-time work). At the same time, agreement was obtained from Brussels to dissociate the price of electricity from that of gas. Public finances, crippled by a debt of 118.4% of GDP at the end of 2021, are under pressure from rising interest rates.
This new decline of Italy and Spain, the third and fourth largest economies in the Euro zone, comes at the worst possible moment. Rome and Madrid are the main beneficiaries of the EU Next Generation recovery plan and will, to a large degree, determine whether it succeeds or fails.
Our country has several features in common with Italy and Spain. But its business model is even more unbalanced because of deindustrialization, a public deficit and a trade deficit. It is also far less advanced in terms of reforming government and the social system. France is a country from Southern Europe that, because of implicit guarantees from Germany, lays claim to the status of a country from Southern Europe. Successive crises have made this wide gap less and less bearable, particularly with the new direction taken by ECB in its strategy. Bridging that gap should be a priority for Emmanuel Macron’s second term of office.
(Column published in Le Figaro, 6th June 2022)