Business Insider: A tiny bank in Italy could decide the future of Europe

The loans on the balance sheets of Italy’s local banks weren’t made to consumers spending beyond their means, or speculative house purchasers, but mostly to local businesses. Their customers were primarily the country’s large number of small- and medium-sized enterprises, often family-run, with business models not that different from the very dynamic enterprises of southern Germany, Austria, or Switzerland, which concentrate on making niche products — specialized textile machinery, for instance — for international markets.

This throwback banking model insulated Italian banks from the fast-developing financial shocks of 2007 and 2008. At the beginning of the global crisis, as other European governments spent large sums bailing out their banking systems, it looked as if Italy had the most solid banks in Europe. The European Central Bank’s calculation of the fiscal cost of bank bailouts for the 2008-2013 period shows a cost for Germany of 8.8 percent of GDP and for Spain of 4.9 percent, with much higher amounts for European countries that required a bailout from the International Monetary Fund (Ireland, 37.3 percent; Greece, 24.8 percent; and Portugal, 10.4 percent). Italy, by contrast, spent less than 0.2 percent of GDP.

But this encouraged a dangerous complacency in Italy, as a slow-moving economic crisis gradually rotted the country’s financial foundation. A long-standing failure to undertake structural reforms has condemned the country to exceptionally sluggish growth, even before the 2008 crisis. Italy’s clothing and textiles sector has been hit by the move of production to Asia or to lower-cost producers in southeastern Europe; even luxury manufacturers are beginning to outsource production. Eventually, the weaknesses of the Italian economy hit the country’s banks with a massive volume of nonperforming loans — the current estimate is 360 billion euros. (It didn’t help matters that the Italian government is often a hindrance; there are many stories of businesses that contract with the government only to find they are never paid.) [...]

In Giuseppe Tomasi di Lampedusa’s great novel The Leopard, Tancredi Falconeri states: “If we want things to stay as they are, things will have to change.” If the government isn’t allowed to help banks directly, it has to commit itself to a new growth dynamic for the entire continent. It remains quite uncertain that it can — or will be allowed to — follow up on that promise.

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