The EU day of reckoning is getting closer than you might think.

Italy is in the news again today.  The first big event is that Giulio Andreotti has died aged 94.  I have to admit that I know little about his time at the top of Italian politics other than that which I have heard.  None of it was particularly good.  

The other big event is that ISTAT (The Italian statistics agency) has today announced that Italy's economy will shrink a further 1.4% in 2013 and that unemployment will reach 12.3% later this year.  Oddly they predict that Italy will return to growth of 0.4% in 2014.   A forecast that I would hardly place a substantial bet on being correct.  

But what does this mean for the average Expat living in Italy?

The sad truth is that it does not mean a great deal, NOW.  If 12.3% of the population are unemployed then 87.7% are still in employment.  It is the unfortunate few that are bearing the brunt of this economic crisis. 

What it does mean is that as France, Germany and other core European countries lurch towards official recession, that the time of reckoning is coming for the EU.   The time for a considered, consistent and permanent bailout programme is fast approaching. 

Reinhart and Rogoff, in their historical book of economic crises 'This time it's different,' tell us that countries can quite happily keep plodding along until BANG!.  There is a moment when the Bond market loses confidence in a country or set of countries and the moment of crisis hits.  The EU is fast approaching that moment.  No one can say for sure when it will be, and the austerity imposed across Europe could continue for some time to come yet. 

But, the truth is that austerity is the right medicine for Italy and other poorly performing, inefficient, public service employment heavy countries.  Asian, Russian and South American countries and companies will not stop, for a second,  to think about continuing to take away more manufacturing work from Italy and other European countries.  The brutal reality is that Italy needs to start competing again.  The only way it can do this is through reform, lower real wages and reduced benefits and entitlements.  EU enforced austerity is the right pressure for these necessary reforms.  Ultimately if the EU were to start printing money and apply a universal bailout fund now then it would only encourage the political caste in Italy to slow down on much needed reforms and the legacy of Andreotti and his cronies would continue to survive.   

So Italy must reform , swallow the bitter pill and push on with adjustments and political instability in the hope that sufficient reform will take place, in time, to ensure that the benefits of a few are spread amongst the many. 

But, the Bond market will not wait forever.  At some point the marketeers will decide that enough is enough and demand that the EU look to a UK and US style bailout plan to stimulate growth.  This moment is fast approaching.  Of course, every action has an equal and opposite reaction. That reaction will be inflation.  

At the Spectrum IFA Group we have been holding seminars in Italy now for 3 years.  We have regularly being talking about the very real future possibility of high inflation and that it is important to prepare and protect yourself for this eventuality before it happens.  As a result we have designed some inflation beating investment portfolio's specifically for the needs of our clients and for other investors alike. 

If you would like to know more about these or any other financial information as an expat living in Italy, then you can contact me on gareth.horsfall@spectrum-ifa.com or on telephone 3336492356.