But not everybody yet realizes how close Italy is to the same fate and what this will mean for other European countries, including France.
Finally, too few of us are making the connection between the European situation and U.S. debt and deficits, and what this says about America's economic future.
Italy's Growing Need for Change lays out in some detail how serious the situation in Italy is for Europe as a whole. It also pretty much confirms that Italy will not grow economically anytime soon and, as a result, its inability to grow and resulting precarious financial condition represents a clear and present danger not only to Italy, but to the whole of Europe and the rest of the world, too.
Here's what the article says:
"If the world's eyes are on Europe, then Europe's eyes are on Italy. Euro-zone leaders made it clear this weekend that Prime Minister Silvio Berlusconi must do more to reduce Italy's debt pile of 120% of gross domestic product. The only way to reduce debt convincingly and ease market concerns is to boost the country's anemic growth profile. But this is a task Mr. Berlusconi has repeatedly failed to achieve.
Investors' lack of confidence is reflected in 10-year Italian bond yields, which last week topped 6% for the first time since early August. While Italy's debt is onerous, it isn't at the root of the country's problems. Excluding interest payments, Italy is set to run a surplus of 0.9% of GDP already this year. Even assuming low growth averaging 0.8% between 2011-2014, as the government does, debt to GDP should fall quite quickly given a fiscal tightening that adds up to 3.5% of GDP.
The problem is even this level of growth may be challenging. Euro-zone purchasing managers indexes from Markit suggest the euro-zone economy outside Germany is contracting. Italy may shrink 1.1% in 2012, according to J.P. Morgan. That fragility means the country's financing remains at risk of a "sudden stop"—with auctions failing and yields spiking higher—if market confidence deteriorates further. That would be a disaster. Italy has the third-largest government bond market in the world, at €1.6 trillion ($2.22 trillion), and needs to roll over €193.7 billion of bonds next year. It is both too big to fail, and too big to save.
The policy prescription is clear: Italy needs to open up closed professions to competition, create a level playing field between temporary and permanent workers and reduce the bureaucratic burden for firms. It needs to decentralize wage-bargaining, perhaps setting an example by differentiating among public-sector wages by region. But these measures have proved politically difficult to introduce for Mr. Berlusconi, who has faced repeated votes on confidence in his administration.
Europe has few levers beyond exhortation. No amount of bank recapitalization or leveraging of bailout facilities will boost Italian growth; indeed, excessive bank capital or ill-thought-out bond insurance plans could even be counterproductive. Mr. Berlusconi holds a continent's fate in his hands."
Italy's debt is 120% of GDP. U.S. debt is now ~70% of GDP and climbing rapidly.
Italy's interest rates on government borrowings are ~6%. U.S. rates are ~2.3%.
Italy will experience at best slow growth and perhaps a recession in 2012. We will likely experience continuing slow growth.
Both Italian and U.S. economic growth will apparently be weak for years to come.
To get out of its economic dilemma, Italy must focus on growing its private sector and downsizing its public sector. So must the U.S. {In that regard, the U.S. is better positioned to do this, since we're not nearly as far down the road to socialism as are European countries, including Italy.}
Let's hope we get down to business and get government out of the way soon, before we become another Europe economically. We're not there yet, of course, but we're sure headed in that direction.
Thanks. Bob.
No comments:
Post a Comment