Brexit Fallout – The Italian Job by Danielle DiMartino Booth, Money Strong
“You’re only supposed to blow the bloody doors off!”
That one line, spoken on the big screen by Michael Caine was crowned, according to a 2003 Daily Telegraph survey, Britain’s favorite one-liner of film. That kind of staying power is remarkable considering The Italian Job, the original that is, was released in 1969, two years before Mark Wahlberg, who portrayed Caine’s character, Charlie Croker, in the movie’s 2003 remake, made his 1971 debut.
As for the film’s American version and one-liners, the crown for favorite was won when Charlie’s 2003 on-screen nemesis Steve taunted: “You blew the best thing you had going for you. You blew the element of surprise.” Charlie’s reaction? A knock-out punch followed seamlessly by the understated comeback, “Surprised?”
The element of surprise was on full display in the hours and days that followed Britain’s voters’ decisive move to Leave the EU. The Brexit referendum succeeded in blowing off a different set of doors, leaving taunting politicians and policymakers alike flat-footed, with a whole new fear, that of contagion, beginning to the south in Italy. Might the Italians pull of a Job of their own, following Great Britain’s lead in stealing back their own country?
The hope, stated diplomatically by Gluskin Sheff’s inimitable David Rosenberg, a dear friend, is that Brexit will prove to be a, “wakeup call for the long-awaited fundamental changes with regards to the EU – make it more democratic and make it less bureaucratic and embark on immigration rules that do not sacrifice regional security.”
Rosenberg’s concerns on security are more than justified in the case of Italy. According to the Italian Coast Guards’ latest tally, the 3,324 migrants rescued June 26 brought the total rescued in just four days to 10,000. Four days! Calm seas have triggered fresh waves of migrants, bringing the total thus far this year to 66,000. The forecast calls for 10,000 more to arrive every week until year’s end. Some 300,000 in total for 2016. The ease with which migrants can cross the seas to Italy means that country takes in 13 to 14 times more than Turkey and Greece. Is it any wonder Italians are exhausted?
At a Brussels Summit, EU leaders were urged to “speed up and increase” the return of migrants deemed to not be bona-fide refugees. In actuality, many making the crossing are simply looking for economic opportunity rather than escaping any real danger. Estimates vary, but only between six and 19 percent of those ordered back to their home countries actually leave. It is patently apparent that the EU does not have sufficient measures in place to combat the problem on behalf of its disgruntled member nations, and must become much more vigilant in its approach.
As economically and culturally debilitating as the migrant crisis has become, it’s critical to take a step back from this particular issue to understand the depth of Italy’s economic plight. The reality is, there’s something greater than just poorly managed migration underlying the unrest in Italy and its EU neighbors.
While the migrant crisis clearly played into Brexit, the vote revealed much deeper anxieties driven by a very visible fact of British life, especially life after the financial crisis. The briefest of visits to the City of London, its streets lined with chauffeured Mercedes, offers ample prima facie evidence of what so many Brits know in their bones – that the distance between “them” and “the rest of us” has grown since the crisis broke.
The average Brit knows they didn’t wake up yesterday ripe to pillory the “elite,” a word that’s crept back into the vernacular like a slowly spreading disease. But they do know they’re not among those who have risen to the creamy top in recent years but have rather been demoted to the ranks of those left behind.
The fairy tale of the wealth effect, that what is good for those at the top of the pecking order is good for the masses, is apparently an international phenomenon. The one saving grace on this count is the British never succumbed to pressure to join single currency. That, however, is certainly not the case for the beleaguered Italians.
Back in the summer of 2012, when Greece appeared poised to leave the EU and escape the euro currency via devaluation of the drachma, Merrill Lynch released a report ranking the countries who stood the most to gain economically from dropping the euro. Can you guess who came in at the top spot?
More than any of its peers, the Italian economy has suffered since joining the euro in 1999. Since 2007, its economy has contracted by 10 percent and suffered not one, not two, but three recessions. Competitive export-led growth has been deeply impaired by virtue of Italy’s being effectively yoked to the massive German economy.
Despite the rise of China, Germany has been able to maintain its top three ranking among world exporters. The secret weapon? That would be the euro. In 1998, the year before Germany switched to the euro, the country exported $540 billion. By 2015, that figure had swelled to $1.3 trillion. Italy’s exports have also grown, but not nearly as robustly, coming in last year at $459 billion compared to $242 billion the year before it joined the euro.
Just as it once was the case with China, Germany benefits from its relatively weak currency. If Germany was not tethered to its weaker-economy neighbors and was still on the Deutsche Mark, it would have a significantly stronger currency and substantially lower exports due to the price of its exports being much more expensive for world markets.
Back in 2011, UBS put pencil to paper and figured that losing the common currency would trigger an immediate effective tax increase for the average German citizen of about €7,000 and between €3,500 to €4,000 euros every single year going forward. By contrast, swallowing half the debt of Greece, Ireland and Portugal at that time would have generated a little over €1,000 tab per citizen. Now you see why bailing out is so easy to do, though the Germans do put on a great show of irritation at having to foot such bills. But let’s be honest. Consider the alternative.
Reverse that effect and, with all else being equal, you begin to appreciate why Italy’s exports have become relatively more expensive, burdened as they are with a more expensive currency than they would have had. Consider that globalization had already done a number on the country’s once magnificent industrial base when Italy opted into the euro and left the lire behind. Since then, the country’s industrial capacity has been further decimated, shrinking by 15 percent. To take but one example, in 2007, Italy manufactured 24 million appliances; by 2012 it had declined to 13 million.
Add up the economic consequences and you begin to understand why Italian unemployment is running north of 12 percent while putting four-in-ten young Italians are out of work. To the Italians, if anyone’s managed to pull off a Job, it’s those smug Germans.
Three years ago, the Merrill report warned that Italy’s current account deficit would be an impediment to returning to