Jacques Cailloux, chief eurozone economist at RBS, was in little doubt about the state of Europe’s third-largest economy this week. “Italy is slipping into recession”.
Manufacturing activity and business confidence are at two-year lows, while a recent Gallup-Doxa poll found that Italian consumers were more pessimistic than their peers in 60 other countries.
So the last thing the economy needed was the recent fall of prime minister Romano Prodi and the prospect of another Berlusconi government set on tax cuts and infrastructure spending.
And the worry for the rest of the eurozone is that Italy’s woes could spread. Even as the economy is slowing, Italy’s two million metalworkers are to receive a 7.2% pay rise this year. Massive wage inflation could turn into a real problem for the European Central Bank; eurozone consumer prices are already rising at a record annual rate of 3.2%, making it difficult for ECB head Jean-Claude Trichet to consider cutting interest rates.
That means a cheap money bail-out won’t be forthcoming for Europe’s other beleaguered economies, a list that now includes Ireland. Property prices have fallen by 3.1% in the past year, and the economy was singled out recently by the IMF as particularly vulnerable to a US slowdown, due to its heavy dependence on US exports and investment.
Then there’s Spain, Europe’s fourth-largest economy, which has been responsible for 40% of all EU job creation over the past three years. It delivered a barrage of bad news this month. House prices are down 7.2%, says the Economic and Social Research Institute, while unemployment claims are rising at their fastest ever pace. Industrial output meanwhile fell at its fastest pace in five and a half years.
In short, there is mounting evidence that far from decoupling from US woes, the EU economy will follow it down the pan, albeit, “a little more slowly this time”, as Thomas Mayer, Deutsche Bank’s chief European economist, put it.