A Century Of French And Italian Economic Decline

Tyler Durden's picture

Europe's dual problems of low growth and weak profit margins combined with this week's vote in Italy are likely to usher in another period of European underperformance, but as JPMorgan's Michael Cembalest notes, that is the least of it as Italy overtook Japan with the worst real GDP growth of all advanced economies since 1991. In fact, other than wartime, the last few years in Italy have been the worst for growth since Italian unification in 1861. But, before the rest of Europe gloats that 'they are not Italy, or Greece', he reminds us that the slowness of French GDP growth in recent years is the slowest in over 80 years. As he warns, all things considered, from an investment standpoint, caution continues to be warranted as problems appear to be taking their toll on EU profitability.


Via Michael Cembalest, CIO JPMorgan,

Why being underweight European equities has been the gift that keeps on giving


Let’s start with the good news: Italy has one of the best fiscal accounts in Europe (its pre-interest budget is in surplus), its current account is in balance (mostly a reflection of a collapse in imports), and Italy finances a lot of its debt on its own without too much reliance on foreign investors (Italy’s Net International Investment Position, a proxy for such reliance, is at -20% of GDP compared to -90% for Spain).


However, growth has been very poor: by the end of 2012, Italy overtook Japan with the worst real GDP growth of all advanced economies since 1991 (0.79% per year, an amazing and sad distinction).  Italians are clearly getting tired of austerity against a backdrop of no growth, and around 25% of them voted for a party which reportedly supports renegotiation of Italy’s debt, a referendum on the Euro and a break-up of large Italian state-owned companies (the 5-star movement).  The protest vote cast by many Italian citizens this week can perhaps be best understood by looking at the chart below.  Other than wartime, the last few years in Italy have been the worst for growth since Italian unification in 1861.



The problem for Italy is that the austerity is not going to end, a consequence of having too much debt (120% of gdp, to be exact), so large that Italy is the world’s 3rd largest sovereign debt issuer despite being 10th in terms of purchasing power.   Countries with that much debt generally have to run a budget surplus before interest, since interest payments are so large.  Italy has done exactly that, running a cyclically-adjusted primary surplus consistently since 1992.  That leaves little room for counter-cyclical stimulus when growth is weak, or when structural reforms create a temporary drag on growth.  To be clear about this, the multilateral borrowing facility (the European Stability Mechanism), the lend-against-anything-that-moves policy of the ECB  and the commitment by the ECB to purchase government debt (the Outright Monetary Transactions program) all substantially reduce the risk of sovereign and bank defaults, not just in Italy but across all of Europe.


EU governments and central banks have provided 800 billion Euros so far to finance foreign investors fleeing Italy and Spain, and could provide a lot more.  But it is getting harder (particularly after last year’s EU equity rally) to dismiss the social and political costs Southern Europe is paying to keep the Euro.  In my view, the old system was messier with its periodic bouts of inflation and devaluation, but worked better for Southern Europe given its structural competitiveness gaps with the North, and its own internal fiscal transfer dynamics.  Some believe Europe is on a long journey to further integration; I think it is just as likely that parts of Europe are on a long and painful journey to discover that a single currency has more costs than benefits in the long run.


As for France, the recent spat between a US tire company CEO and French Industrial Renewal Minister Montebourg got a lot of publicity.  There is hyperbole being thrown around by both sides, but we do find evidence that France has created a worker’s utopia compared to many other countries.  Last year, we showed a chart indicating that France has the most worker-friendly environment of 40 countries analyzed (November 7, 2012), a computation based on labor force participation,  ease of hiring and firing, retirement age as % of life expectancy, working hours per year, vacation days, linkage between pay and productivity, unemployment benefits as % of wages, etc.  France has been trying to enact reforms, but my sources differ sharply on their potential for success.  France has lost a lot of ground to Germany since the Euro was launched, and I’m not sure Industrial Renewal ministers can change that.  Here are some stats from Bernard Connolly at Hamiltonian Advisors:


  • The share of French corporate profits in gross value added is the smallest of the six major EU countries, and falling
  • While Germany has maintained its share of world exports, France has lost one third of its share since the Euro was launched.
  • France’s current account deficit is around 6%  of GDP (in other words, very large) after taking into account depressed consumption due to high and rising unemployment


The growth challenge for France is something we will have to watch as well.  It’s not as bad as in Italy, but as shown below, other than during wartime (see Appendix on why wars are excluded from charts like this), this has been a very bad stretch for French growth.  A period of no growth over 7 years in France is something seen more frequently during the 19th century.  It was also seen during the 1930’s when France stuck to the gold standard longer than other countries did, and paid a price.  The are some parallels between the gold standard in Europe in the 1930’s and the binding constraint of today’s currency union.



European equities might get cheap enough at some point, but last year the valuation gap vs the US narrowed, particularly among financial stocks, and they don’t look cheap enough yet.  We don’t know where things will go from here in Italy.  Europhiles predictably believe that a grand Italian coalition will form and work together to avoid another round of elections.  I understand why, since in Greece, a second round of elections simply ended up increasing fringe party votes.  Perhaps what Italians really want is a little less fiscal austerity, and are asking their politicians to figure out how to do it without upsetting German demands for more.  I can see Germany agreeing for some forbearance before its own elections to avoid a larger problem.


All things considered, from an investment standpoint, caution continues to be warranted.  Our 2013 Outlook included the following at the end of the Europe section: “By primarily relying on unemployment and wages to restore competitiveness, Europe is taking the road less traveled and remains an economic and social experiment of the highest order.”  Not much has changed since.  As always, it’s important for investors to avoid over-extrapolating macro issues when there are opportunities to be had in financial markets.  However, while European companies earn a substantial amount of revenues outside Europe, their domestic exposures and exposures to other weak EU countries are too large to ignore.



The last chart shows a proxy for profit margins by looking at earnings relative to sales for the 3 major regions.  As shown, problems in Europe appear to be taking their toll on EU corporate profitability.

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Jason T's picture

It's all becaues of productivity .. it's over!  maxed out.. done for.  Tis why the West is in trouble.  The East is so far behind, they're only just playing catch up.

CPL's picture

It's a by product of being unable to export inflation to other countries.  Eventually the standard of living increases elsewhere, and things get expensive that stuff can no longer be considered cheap.  It's why globalisation only works in terms of friendship, but never finances.

fomcy's picture

GOLD falling like a penny stock again.. It's capped.

Cookie's picture

pass me the white flag...

Winston Churchill's picture

Take two aspirin, and call the undertaker in the morning.

CPL's picture

The operation was a success but the patient is dead.

Ham-bone's picture

they never intended on saving the patient, it was really only intended as an organ harvest anyway

CPL's picture

"What are three things you don't want to hear in a hospital?" for $400 Alex.

bank guy in Brussels's picture

As the Morgue says above, quite accurately:

« ... parts of Europe are on a long and painful journey to discover that a single currency has more costs than benefits in the long run ... »


Dump the euro, Mediterranean countries ! Beppe and Berlusconi, get together and DO IT ! Out of the euro, NOW !

Freegold's picture

Yes it sure is a long and painful journey too Freegold. The problem is the old current $monetarysystem of piling up FIAT-debt. Europ will be fixed when Freegold emerges as the inevetable market choice. Gold will once again flow from debtor- to surplusnations. The pricesignal from gold will prevent imbalances to grow too large.

All the political shuffling of debt and "regulations" is just a sideshow. It doesn´t matter what they do. The tides of old-gold world was there all the time, only the illusion of FIAT-wealth kept it under the radar. You can buy gold near spot now, just don´t ask for like 10 tonnes or more. The you will find that the price is somewhat different.

Gold +50K/ounce next week or or next year or.... get your ticket while it´s still dirtcheap :)


Ghordius's picture

& - would someone explain to me how long the lira would be preferrable to the EUR, for Italians

Ghordius's picture

btw, don't ALL economies called "developed" have a similar 200y growth chart?

JPMorgan, your Italian and French books?

Volaille de Bresse's picture

Well GDP is a relative thing : if a plane crashes on Paris killing thousand of ppl, the GDP will go up!

Roandavid's picture

Or Century ..... either is good.

Bam_Man's picture

It's all because of lousy demographics, bitchezzz. Ditto for Japan.

Lousy demographics play havoc with masssive government-sponsored Ponzi schemes masquerading as "economies".

Praetorian Guard's picture

Won't make a difference. NASA indicates massive comet will strike Mars in October, with a 20 billion megaton yield, and 500 kilometer impact crater... massive debris ejected into space...

TraderTimm's picture

An "outside chance" isn't the same as "will strike".

Reference: http://phys.org/news/2013-02-comet-collision-mars.html

They're anticipating it will pass within 109,200 km (~67,853 Miles) of Mars. Even if it did hit the red planet, wouldn't do jack to us.

It'll pass Earth in December at a distance of 63,000,000 km (~39,000,000 Miles). Oooh, scary, lol.

Reference: https://en.wikipedia.org/wiki/C/2012_S1

Praetorian Guard's picture

Wrong. Course has been changing - only discovered 12 days prior. Current calcs put it at 650,000 miles, but several astrophysicists saying it may indeed impact. ...and yes it will eject a ton of shit into space... Just wait until Earth passes through the tail of the other comet in November, its a beast...

Theta_Burn's picture

Fear not DOW about to crack 14000...

Sandmann's picture

Anyone recall this ?  http://en.wikipedia.org/wiki/Lisbon_Strategy

The Lisbon Strategy intended to deal with the low productivity and stagnation of economic growth in the EU, through the formulation of various policy initiatives to be taken by all EU member states. The broader objectives set out by the Lisbon strategy were to be attained by 2010.

It was adopted for a ten-year period in 2000 in Lisbon, Portugal by the European Council. It broadly aimed to "make Europe, by 2010, the most competitive and the most dynamic knowledge-based economy in the world".

SmallerGovNow2's picture

How's that working out for Europe?

thisandthat's picture

We need to peg reality to plans - that'll do...

Inthemix96's picture

The fucking in-bred arsewipes ruining europe couldnt hold a piss up in a brewery.

They have nearly as much use as a chocolate fire guard, Jesus H fucking Christ himself would have a laugh at the cock-up we have become.  And all in the name of greed and graft.

Its past time to bring this shit show to an end.  The people are hurting, they carry on like this, the grifters will get it next, and trust me, these cunts are going down, from Paris to Berlin they will fucking shit themselves when the people finally say "No".

Fucking in-bred idiots, they cannot see the end is nigh, and perpetuating this charade will only make the reckoning worse.

Bookmark it.  It will happen.

SmallerGovNow2's picture

Same show here, Ried, Pelosi, Frank, et al just to name a very few.  Freak show...

Notarocketscientist's picture

How can total economic collapse be made any 'worse' 


Oldwood's picture

But the French are cool! Everyone wants to be French, no? They can simply remain French and people will line up to pay real money to look and speak like the French. Productivity be damned. To be cool is where its at, even if we must eat dirt!

SmallerGovNow2's picture

I'm sure people have heard it before but it is worth repeating.

The mainstream media sure isn't going to.

Nor will they report that the sequester was the administrations idea.

Nor that a couple of months ago the president said he would veto any bill that stopped the automatic cuts which he now says will cripple the economy.


Our media has become the USSR (USSA) propaganda bureau.

Citizens should be outraged that they are being lied to.


"The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. Increasing America’s debt weakens us domestically and internationally. Leadership means that the buck stops here. Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better."


Senator Barack Obama (D-IL)

Speech Given on U.S. Senate Floor Objecting To Raising Debt Ceiling Limit

March 16, 2006

Official National Debt at that time: 8 trillion USD

Oldwood's picture

Stop using hate-filled facts in an effort to illuminate the reality that most do not want to see. Peace and beauty are illusions that must be maintained at all costs. Ugly facts will not be tollerated!

Oldwood's picture

Zombies! low maintenance and easy to manipulate. All they need is a functioning brain to eat now and again and it is an absolutely sustainable system

libertarian_neocon's picture

The US version of these charts, while definitely better until 2000, really starts to deteriorate around then.  We used to be averaging 7 year real GDP growth of between 20-35 or 40% and now we are at 7.2%.  Pretty depressing.  You can see the chart here:  http://libertarian-neocon.blogspot.com/2013/02/the-decline-of-america-in...

ektor's picture

some graphs coming from CIO JPMorgan, no doubt I trust it