Home > debt crisis > Italy on the Brink

Italy on the Brink

from Peter Radford

By now you know the news: Italian bond prices have climbed to levels only recently reserved for the likes of Ireland, Portugal, and Greece. A catastrophe is on the horizon.

We need not dwell on the details because the situation is too fluid. The Italians have postponed remedial action for way too long, and the supposedly solid core nations – particularly the Germans – are steadfastly refusing to take the necessary steps to avoid disaster.

In my opinion the only viable solution is a combination of aggressive expansion and growth oriented policies in Germany and the other “corer” nations; a much weaker Euro; and simultaneous austerity and competitive adjustment in the so-called peripheral nations like Portugal and now Italy. Any other option – and there are a few being kicked around – are temporary and will lead to an inevitable break up of the single currency. At present I am not sure the Euro will survive anyway.

The Italians, like the other peripheral nations have plunged into a fundamentally unsound uncompetitive relationship with the core nations, especially Germany. This is untenable. Under non-Euro circumstances the remedy is clear: a devaluation of the domestic currency, possibly an arranged default, and subsequent growth. Within the strictures of a single currency a devaluation is not possible, so the adjustment comes in the form of an enforced deflation – or internal rather than external devaluation – which is both pronounced and pernicious. A nasty recession lasting years is almost inevitable within any country taking such action.

Italian growth is simply too low, and interest rates now too high, for its debt to be reduced through “normal” policies. We have entered crisis and urgent response territory.

Some of you have asked why the situation in California has not precipitated a similar default circumstance here. California after all has managed its way to a fiscal ruin very similar to Italy’s. The reason is simple: California falls under centralized federal fiscal policy, which can thus mask the shock. Plus cross border flows of jobs, workers, etc are more easily accomplished in the US. So California’s adjustment, while it is going on, is just one part of a more integrated whole, whereas those of the likes of Greece or Italy are much less smooth because there is no single fiscal policy umbrella, and those other movements are more difficult. So the tensions build up more dramatically in the case of the Euro Zone than they ever do here.

If the Euro Zone cannot find a way to manage this next round of crisis it will implode. The reverberation from a collapse would have nasty knock on effects for global trade and US banking. It may well push us into a recession.

So pay attention. And let’s all hope the Europeans change their ways and act decisively for a change

  1. Ulrich Brasche
    November 10, 2011 at 12:19 pm

    Dear Peter Radford,
    I share your views on the situation in Italy and on the Euro. The solution you proposed concerning fiscal expansion however might not work: Germany runs explicit public debt of 85% (plus implicit of 250%); additional liabilities will materialize soon in a Greek default.
    Voters in France, Italy and Germany oppose any cuts in public generosity in their own countries – politicians seeking reelection have no choice – as the German case of the Schröder government demonstrated. The often discussed European fiscal policy can´t rely on “strong” countries controlling “over-spenders” and providing a expanionary fiscal locomotive – those countries don´t exist.
    The destination might be the “Great Debt Deleverage” in all countries.

  2. November 10, 2011 at 5:33 pm

    The EU experiment is doomed to fail. Monetary union without political union is a recipe for for conflict between have and have-not states as can be seen unfolding at this time.
    Moreover, the debt based financial system with rising debts out of control makes ultimate failure a certainty.

  3. Geoff Davies
    November 11, 2011 at 12:53 am

    The euro currency was always unnecessary and now it is evident it is also a dumb idea. If people are clinging to it, it must be because of power, not need.

    Let the euro crumble, it was a dumb idea.

  4. Alice
    November 11, 2011 at 10:49 am

    Effective remedial actions by Italy would have meant that the clown Berlusconi would have been gone long ago.

    Amazed he lasted as long as he did but politics seems to attract all the wrong types.

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.