Three pivotal Mediterranean economies

The economies of Italy, Greece and Turkey are pivotal to the economies of the Mediterranean Sea. These economies are stakeholders in a broader band of economic activity that links Europe, Asia, the Middle East and Africa. Italy: All Roads Lead to Rome It’s been said that “all roads lead to Rome” and in the case of the Mediterranean economies Italy is truly the colossus. The Italian economy looms over the region as an economic giant linking Europe and the economies of the Southeastern Mediterranean. With an estimated 2013 GDP of $1.805 trillion, estimated GDP per capita of $29,600, imports at $435.8 billion and exports at $474 billion, Italy is an economic giant compared to its neighbors. But Italy is a nation of incomprehensible politics and whose economic diversity still reflects the “city states” from which the peninsular nation evolved into modern statehood. Venice isn’t Genoa, Naples is not Milan and none of them are Rome. Italy’s economy reflects these multifaceted beginnings with the industrial north and agricultural south having greatly different structures and demands. Still, compared to its neighbors like Slovenia, Croatia, Bosnia & Herzegovina, Albania, Tunisia, Libya, Egypt and Greece, Italy, for all its flaws, is still the major Mediterranean economic power – a center tying the East and West Mediterranean together. For Europe, Italy represents a major trading partner and gateway to the Mediterranean economies. But Italy hasn’t done very well since the financial crash of 2009. The country has reeled from one crisis to another. In early September, the IMF (International Monetary Fund) again revised downward the economic forecast for Italy. The IMF forecasts that for the third straight year, Italy’s economy will shrink while the public debt will continue to rise. A vexing combination for Matteo Renzi’s government, which is being pressured by the IMF and EU (European Union) to follow through on promised reforms. The IMF now believes Italy’s GDP (Gross Domestic Product) will dip .1% in 2014, as opposed to gain of .3% the fund had forecast earlier in the year. In 2012 the Italian economy GDP fell by 2.4% and in 2013 by 1.9%. Some economists have gone so far to say that Italy has become the first major European economy to slip back into recession, pointing out that the GDP is around 8% lower than the 2007 pre-crisis levels and unemployment is over 12%. But as alarming as these numbers may be, inflation is still relatively low 1.2% (a five-year low) and the nation has robust industrial and trade sectors, posting a rare trade surplus for the Euro-Zone. Even the IMF is unwilling to pin the “recession” label on the Italian economy, sticking to its 1.1% increase in GDP in 2015. However it is fair to say that the IMF is probably being generous in both the 2014 and the 2015 assessment of the Italian economy. For example, the OECD is forecasting only a .1% growth in 2015.What is a concern is the extent of public debt. Italy’s public debt is expected to rise 4 points to 136.4% of GDP by the end of the year. This up from the 132.6% and next to neighboring Greece, is second in the entire Euro-Zone. Italy as a trading nation is a bright spot both in Europe and the Mediterranean and a reason for economic optimism despite public debt issue. The reversal of fortune began in 2012. For years, Italy ran a trade deficit but in 2012 with a reduction in imports and an increase in exports, Italy was able to reverse the trend and post a trade surplus. The trend has continued since then and through July exports were up 1.1% YOY (Euro 38.55 billion), up 2.5% in the Euro-Zone and off .5 for non-EU nations. The biggest gainers for export trade came with the US at 18.4% the Czech Republic at 16.4% and Spain at 10.5%. This year Italy will likely even run a trade surplus with China, a rarity in the Euro-Zone. Part of the reason for the turn of events is a restructuring of imports. Imports in July YOY fell 1.4% to Euro 31.69 billion but were up 2.2% for EU nations and down 5.6% for non-EU countries. Imports from OPEC (Organization of Oil Exporting Countries) were off over 30% and Russia was down over 27%. Energy products were the main reason for the drop in imports with imports of natural gas down 30.4% and refined petroleum products off nearly 24%. It is the trade trends that make Italy’s recovery seem likely despite the concerns over the public debt and financial sector.

Greece: Alive in the Ruins The Greek economy has been lying in ruins for the past five years…and some of their European Union partners would argue for decades although officially the numbers didn’t begin their downward spiral until late 2009 in what would be labeled as the “Greek Recession”. But the Greek economy maybe in revival as for the first time in 24 quarters the economy is expected to grow. Greece’s economy shrank by 1.1% in the first quarter this year, and another 0.3% in the second quarter. If the country can post two consecutive quarters of modest growth, Greece might just end 2014 as year of economic growth. When earlier this month, the Greek government announced the country’s economy was expected to post growth in the third quarter (the Greek government is forecasting a .6% growth for the year) the government also expressed a plan to exit from the terms of the unpopular rescue program, implemented in 2010. Greek Prime Minister Antonis Samaras says he wants to end the Euro 240 billion ($304 billion) in bailout loans for 2015 and 2016. As expected the Euro-Zone finance ministers are skeptical that a yet unrealized quarter of growth hardly warrants the change. The economy dropped 30% from its pre-recession size and according to estimates has a real unemployment rate of 25%, with many Greeks relying on employment under the table and consequently tax avoidance. It’s estimated that 24% of economy activity is off the books. It’s not only the shadow economy that makes Euro-Zone finance ministers nervous but back in 2009 it was discovered that the Greek government had concealed figures on an immense budget deficit that began tumbling through the European markets like dominoes. Greece also has the unenviable distinction of having the highest public debt in the EU [Italy is second]. ELSTAT [Hellenic Statistical Authority] recently announced that the nation’s public debt in 2013 was Euro 319.1 billion or 174.9% of GDP. By contrast the EU-27 and US public debt versus GDP is just over 87%. ELSTAT also announced that Greece’s public debt last year came to 319.1 billion euros, or 174.9 percent of GDP. The government is anticipating that the ratio will fall to around 168% this year, although these numbers are considered to be optimistic by EU finance chiefs. Greece has a relatively small GDP of 241.7 billion, nearly the same size as the country posted in 2006. In terms of comparison the states of Virginia and Massachusetts both have much larger GDPs of over $341 billion. But the importance of Greece to the EU is far greater than its pure economic contribution. Many in the EU fear that should Greece decide to leave the EU because of what is perceived in Greece as an economic inequality between themselves and the EU’s elite North European economies like Germany and France, the entire union could unravel. While such fears may be exaggerated, what is true is that the EU is deeply concerned about the Greek economy. The main point of contention is that the Greek economy has been a drag on the Euro (although in fairness, Greece is not alone as a number of other EU economies have been pulling the Euro downward). Finance ministers worst nightmare is the fear of a union-wide 2009 relapse that the unexpected hidden Greek budget deficit triggered. Back in 2010, Greece accepted a bailout deal from the EU and IMF that included painful austerity measures with a goal of getting the budget deficit back to 3% of GDP by 2014. Known as the Troika (European Stability Mechanism, EU partners and IMF), the group overnight became Greece’s largest main creditors. In turn the Troika provided Euros 110 billion (spread over three years). In 2012 another bailout deal was crafted to avert a potentially catastrophic default. This deal was for Euro 130 billion and Greece was to cut its public debt to 120.5% of GDP by 2020. European funding for the bailout is scheduled to end this year while the IMF’s portion is due to end in March 2016. Prime Minister Antonis Samaras in his new budget addressed Greek public concerns over the austerity moves imposed on them with the bailout. The major points include dropping the maximum income tax cut to 32% from 42% and the corporate tax rate reduced to 15% from 26%. Samara is under pressure from the left and staying in office very well could hinge on concessions from the IMF (who probably wouldn’t find the opposition Syriza party as easy to work with). The IMF may be a little skittish letting the Greeks go it alone, a little like sending a child on its first bike ride without training wheels, but there is an inevitability to the process and should they fail, the best hope might just be a soft place to land. Turkey: At the Crossroads Turkey, bordering Asia, Europe and the Middle East has benefited from being a trading nation at the crossroads. In recent years, as a sea of chaos has reigned all around, Turkey has managed to be an island where stability and economic growth were almost expected. With the exception of 2010, Turkey’s GDP has grown since 2005, a remarkable feat given the extraordinary pressures the country has been subjected to over the last decade. But now Turkey is at new crossroads, a test of sorts, on whether the economy will continue to grow or slip backwards. Back in late September, the IMF released a report indicating that in 2013 Turkey’s GDP would continue to grow at the modest rate of around 3%. The IMF’s reasoning for slowing growth was the economy’s dependence on domestic consumption as an economic driver, sluggish export growth, and a lack of investment, low domestic savings and the need to address the problems of inflation. What wasn’t mentioned was the considerable turmoil on the nation’s borders and the impact these conflicts have had on the economy both politically and financially. Earlier this month the Turkish government also lowered its growth estimates and raised its inflation forecast for 2014 and 2015. The Turkish government said unfavorable global conditions, the tensions in Iraq, Syria and the Ukraine and slower growth in Europe would hamstring growth. The government also said that inflation was likely to hit 9.4% by year-end. This is far higher (possibly under estimates real conditions) of Turkey’s central banks forecast of 5.3%. The central bank now forecasts that inflation will hit 6.3% in 2015. Turkey’s trade imbalance is also a factor, albeit one that rarely raises an eyebrow when a nation is continually posting GDP growth figures. In August, (last report) Turkey’s trade gap increased to $8.04 billion from a USD $7.08 billion shortfall a year earlier. It is the highest trade deficit since December of 2013. Imports rose 7% over a year earlier to $19.47 billion. China was Turkey’s top import partner, standing for 11.6%, followed by Russia at 10.9% and Germany 8.9%. The US exports to Turkey were just over $12 billion in 2013, while imports hit $6.7 billion. The US would like to see Turkey play a more active – from the US perspective – role in the Iraq conflict but Turkey considers Syria’s Assad Hussein the main threat to their stability followed by the Kurds. However, the US has few cards to play that would sway any change in the Turkish government’s point of view. However, improving trade ties holds some interest. With interest rates set to rise and little prospect for an improved investment climate, one remaining device in the economic toolbox is trade deficit reduction. With the TTIP (Transatlantic Trade and Investment Partnership) (TTIP) between the U.S. and EU providing the backdrop, Turkey has suggested that pact hasn’t provided the economic framework it would expect. Turkish officials believe the TTIP between the EU and U.S. might open Turkey’s markets to imports, but block it from the tax advantages associated with exporting goods to the same states i.e. exacerbating Turkey’s trade imbalance. In short, Turkey feels it is not a party to the deals between the U.S. and EU and the countries involved are unwilling to make comparable agreements with Turkey. The US Department of Trade has also imposed anti-dumping taxes on Turkish steel bar producers and Turkey has threatened with moves in kind. If the US is to mount a “charm” offensive with Turkey based on potential benefits from improvements in trade, removing a few roadblocks might be a way to begin.