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Eurozone Crisis Continues as Italy Becomes Fragile

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Silvio berlusconi

Silvio berlusconi

As the Eurozone debt crisis continues, attention is turning from Greece to Italy as Europe's third-largest economy is beginning to buckle and worries emerge of more widespread economic collapse than previously thought. Yes, Greece's debt is bad at $500 billion. But, Italy is at $2.6 trillion (five times larger than Greece's), and is also at risk of defaulting. Italy is also a much larger economy than Greece, so Greece defaulting is one thing. Italy is completely another.

What's Going On?

The tide has turned from Greece, to Italy. The Italy debt crisis has much more potential to spread through the rest of Europe, and to the United States, than did the crisis in Greece. Europe is currently a quarter of the global economy. If the Italy debt crisis implodes upon itself, then the impact will be much worse than projected if Greece imploded.

The pace of the Italy debt crisis has also accelerated, as just this week it became much more expensive for the Italian government to borrow. The cost of trading Italian debt and Italian bonds have increased, which increases the size of the bailout needed to save everything, and increased it to the point to where it might be too costly for the European institutions to save. Even if Greece were to be saved, and Italy not, the Eurozone debt crisis would not be solved at this point.

Making this problem even harder is that Silvio Berlusconi resigned as the Italian prime minister this week, putting the country into political chaos in addition to its economic chaos. There hasn't been any final decisions made as to whether Italy will hold elections, or form an interim government. Berlusconi has expressed that he would like to see elections take place, but there is no agreement among political parties on either a national unity or technocratic government. There is no guarantee that reforms to cut the mountain of Italy's debt crisis and that boost growth will be quickly implemented, despite Berlusconi's departure.

Overall, this whole thing will have a profound effect on the world economy. Only time will tell what that profound effect will be.

What's Next?

The European Union needs a plan, and fast. The EU was prepared and able, to take care of Greece, but the largest economic zone in the world simply cannot afford to bailout two countries, let alone Italy by itself. However, Italy's problem, as well as the entire Eurozone debt crisis, is not yet insolvent. The European Central Bank could still gain time by pledging to buy Italy’s debt in unlimited quantities and to protect European banks. Even so, it seems all the more likely the the Eurozone will split up, or at least change how it will operate.

Also consider the perception that countries such as China, India, and Brazil have on the Italy debt crisis. It's more than a problem that's in Italy or in Europe. It's perceived as a crisis of the West, of the rich nations, and potentially could present an opportunity for them to rise further and faster if the EU were to implode. After all, no matter what Europe does to solve the Eurozone debt crisis, or even just the Italy debt crisis, or the Greek one, it''ll set a precedent. Spain, Belgium, and France are edging closer and closer to crisis mode as well, and the United States isn't doing a whole lot on its debt, even though it's not at risk for default yet.

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  • Luis de Agustin says:

    What’s next should be the following, according to Willem Buiter, a Cambridge economist who served on the Bank of England’s monetary policy committee, advocates a completely different approach. A sound, but politically unpalatable policy, would be to permit transparent default by Greece and other individual governments
    that have mismanaged themselves. Buiter suggests a “You Break it You Own It” policy whereby insolvency of a sovereign is settled between the taxpayers of that sovereign and its creditors, leaving the European Union out of it.

    According to macro-research firm, Wainwright Economics, default would temporarily cut the governments of Greece and others from the bond markets and force them to balance their budgets. It would also relieve the pressure on other countries that are sinking into the same morass, but which are obliged to pay their share of the costs of rescuing their weaker fellows. Default followed by spending curbs has a good track record. It is the route by which Argentina achieved its current success, with a real growth rate of 7½ % last year according to the CIA.

    Luis de Agustin

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