By Michael Spence, Project Syndicate
As the economist Mario Monti’s new government takes office in Italy, much is at stake – for the country, for Europe and for the global economy. If reforms falter, public finances collapse and anemic growth persists, Italy’s commitment to the euro will diminish as the perceived costs of membership come to outweigh the benefits. And Italy’s defection from the common currency – unlike that of smaller countries, like Greece – would threaten the eurozone to the core.
Italy is a large economy, with annual GDP of more than $2 trillion. Its public debt is 120% of GDP, or roughly $2.4 trillion, which does not include the liabilities of a pension system in need of significant adjustments to reflect an aging population and increased longevity. As a result, Italy has become the world’s third-largest sovereign-debt market. FULL POST
Editor’s Note: Evan Liaras is the Davis Post-Doctoral Fellow in European Studies at the Institute of European, Russian, and Eurasian Studies at George Washington University. Harris Mylonas is Assistant Professor of Political Science and International Affairs at George Washington University and Academy Scholar at the Harvard Academy for International and Area Studies.
By Evan Liaras and Harris Mylonas - Special to CNN
After reading about the Greek debt crisis for over a year now, you might think you understand what it’s all about. You’re probably wrong. International media focus on how the Greek government and people spend their money. But an equally important problem is the inability of the Greek state to collect revenues.
The story constantly aired by various news outlets is simple enough. Greece, we are told, free-rode on the security offered by the rest of Europe to attract money from foreign investors, and then spent it lavishly on its bloated public sector. In case you don’t get it, BBC’s website has a recurring instructional slide show titled “What went wrong in Greece?” Apparently, Greece’s adoption of the euro “made it easier for the country to borrow money.... Greece went on a big, debt-funded spending spree, including paying for high-profile projects such as the 2004 Athens Olympics.” FULL POST
Editor's Note: Matthias Matthijs is Assistant Professor at the School of International Service of American University and a Lecturer at the Johns Hopkins School of Advanced International Studies. Mark Blyth is Professor of International Political Economy at Brown University.
By Matthias Matthijs and Mark Blyth, Foreign Affairs
"Never did a ship founder with a captain and a crew more ignorant of the reasons for its misfortune or more impotent to do anything about it." This was Eric Hobsbawm's damning judgment of the policy elite's response to the Great Depression. As these leaders reached for the old truisms of balancing budgets, lowering tariffs, and restoring the gold standard, they merely worsened the crisis. The same judgment may soon be passed on Germany for its role in the ongoing European sovereign debt saga.
After watching the economies of Greece, Ireland, and Portugal founder, the world has now turned its attention to Italy, home to the world's eighth-largest national economy and third-largest sovereign bond market. The diagnosis is sadly redolent: Europe should deflate its way to growth by sticking with a gold standard of sorts: the hard-money German-dominated euro. Meanwhile, under enormous international pressure, the Greeks replaced socialist Prime Minister George Papandreou with Lucas Papademos, a former official of the European Central Bank, and the Italians placed economist and former European Commissioner Mario Monti, hailed "super Mario," in the stead of Silvio Berlusconi.Yet despite the EU's coup d'état, the yield on ten year Italian debt went back above seven percent within twenty-four hours of Monti showing up for work. FULL POST
By John Cookson, CNN
Former hedge fund manager George Soros has a 7-point plan to save the Euro Zone. He argues that Europe's main financial mechanism used to stave off collapse must reorient from guaranteeing European government bonds to guaranteeing the European banking system. The European Financial Stability Facility (EFSF), otherwise known as the ‘bailout’ fund for countries that use the euro, is too small to guarantee the sovereign debt of larger economies, says Soros. The EFSF was designed for propping up countries like Greece, which accounts for only two percent of the European Union's gross domestic product. But the debt burdens of Italy and Spain - the third and fourth largest economies in the Euro Zone - are simply too large and the EFSF too small, Soros told Reuters editor Chrystia Freeland.
Instead, says Soros, the EFSF should guarantee the European banking system as its lender of last resort. With the EFSF as a backstop, banks could be persuaded to buy treasury bills from the governments of Italy, Spain and other euro nations. This would allow these countries to continue financing their debt at reasonable rates. Meanwhile, banks would then either hold these treasury bills or, if liquidity were needed quickly, sell them to the European Central Bank (ECB) at any time. Key to this plan, says Soros, is that it is within the letter of the law that the ECB cannot directly finance governments.
Much of the detail has yet to be worked out, but, Soros writes in the Financial Times, such “measures would be sufficient to calm markets and bring the acute phase of the crisis to an end.”
What do you think?
By Fareed Zakaria, CNN
The European crisis that you've been reading about in the paper is worth watching carefully. In fact, it has now morphed into something much bigger than a European crisis - it could batter the entire global economy, which is pretty fragile anyway.
You've read a lot about Greece, but the problem in Europe is Italy. Greece is a nano-state; it makes up about 2% of the European Union's gross domestic product. Italy, on the other hand, is one of the seven largest economies in the world. Its debts are greater than those of Spain, Portugal, Ireland and Greece combined. It has long been governed in an almost cartoonishly bad manner. Italy is too big to fail but might also be too big to bail. Even Germany might not be able to credibly bail it out along with all the other troubled countries. So what can be done?
Editor's Note: Christopher Alessi is an associate staff writer at CFR.org. This is an Analysis Brief, reprinted with the permission of the Council on Foreign Relations. The views expressed in this article are solely those of Christopher Alessi.
By Christopher Alessi, CFR.org
Italian Prime Minister Silvio Berlusconi agreed to resign (LAT) after parliament passes new budgetary measures for 2012 meant to tackle Italy's mounting public debt. Berlusconi's decision came after he lost his parliamentary majority and a critical coalition ally publicly called on him to step down. Nonetheless, yields on ten-year government bonds reached a euro-era high of 7.4 percent (NYT) on Wednesday, signaling a continuing lack of market confidence in Berlusconi's ability to pass needed austerity measures and fend off eurozone sovereign debt contagion. FULL POST
Editor's Note: Barry Eichengreen is Professor of Economics and Political Science at the University of California, Berkeley. His most recent book is Exorbitant Privilege: The Rise and Fall of the Dollar. The views expressed in this article are solely those of Barry Eichengreen.
By Barry Eichengreen, Project Syndicate
It may be hard to imagine that Europe’s crisis could worsen, but it just has. European Union leaders failed at their summit two weeks ago to produce anything of substance. China and Brazil are clearly reluctant to come to the rescue by providing a large injection of foreign cash. And the recent G-20 summit in Cannes produced no agreement on steps that might have helped to resolve the crisis.
Now there is the collapse of the Greek government. The trigger may have been outgoing Prime Minister George Papandreou’s ill-advised decision to call for a referendum on the EU’s rescue package (which implies further severe austerity measures); but the fundamental problem is that a brutal recession made the government’s demise all but inevitable.
The formation of a new national unity government does not mean that the Greek problem is behind Europe or the world. On the contrary, the new government’s position will be no more tenable than that of its predecessor. Until there is hope, however remote, that Greece can begin to grow again, the problem will not go away. FULL POST
Editor's Note: Nicolas Jabko is associate professor of political science at Johns Hopkins University and at Sciences Po-Paris. The views expressed in this article are solely those of Nicolas Jabko.
By Nicolas Jabko, Foreign Affairs
The anxiety surrounding the G-20 meeting in Cannes this week only deepened when Greek Prime Minister George Papandreou called for a popular referendum on the debt agreement reached between his country and its foreign lenders, placing the deal in jeopardy. Although Papandreou soon called off the vote, fears of a Greek default highlighted a critical transition at the top of Europe’s banking system. The accession of Mario Draghi, the former governor of the Bank of Italy, to the presidency of the European Central Bank will help decide how the Europeans will address the fundamental problems at the root of the current debt predicament.
Draghi is replacing Jean-Claude Trichet, who is stepping down after eight years on the job. Trichet made the ECB a respected and powerful institution. Only the U.S. Federal Reserve currently surpasses the ECB in steering global market expectations, and Trichet himself became a central figure in EU policymaking and an indispensable partner to European governments. Yet he is retiring in the midst of an emergency. Draghi immediately asserted himself as he took the helm, lowering interest rates by a quarter of a point, to 1.25 percent. But he may need to expand the ECB’s role even further to prevent a catastrophe in the eurozone. FULL POST
By Fareed Zakaria, CNN
It is ironic that Greece - a tiny economy that is a mere 2.2% of the Eurozone and not even among the top 25 economies in the world - has produced so much turmoil. But there has always been a fundamental flaw in the design of the Eurozone. Europe created a single currency without adequate fiscal policy coordination. Very competitive economies like Germany were joined together with uncompetitive economies like Greece.
Nevertheless, I remain cautiously optimistic. This is because, despite what many critics say, Germany is playing its cards right. Many argue that Germany should come up with a dramatic solution to the debt problem. Chancellor Angela Merkel is not leading, critics charge. I disagree. Germany has a good reason for being sluggish. It is trying to force countries like Greece to enact meaningful reforms.
Editor's Note: Thomas Meaney is a doctoral candidate in history at Columbia University and an editor of The Utopian. Harris Mylonas is Assistant Professor of Political Science and International Affairs at George Washington University and an Academy Scholar at the Harvard Academy for International and Area Studies.
By Thomas Meaney and Harris Mylonas - Special to CNN
Call it reckless, call it bold, but the Greek Prime Minister, George Papandreou, has attempted to transform a referendum on the European Union bailout plan for Greece into a referendum about whether the Greeks want to stay in the Eurozone or not. The last time Greece had a popular referendum was in 1974 to decide if the people wanted to keep King Constantine, a descendent of the Royal family that European Powers foisted on the Greek people in the 1860s.
This time around, the Greek Prime Minister has shocked the rest of Europe — and even his own Vice President —with his plans to call for a popular vote on whether to accept the 50% haircut deal that EU heads of state agreed on last week to manage the country’s spiraling debt crisis. It’s the latest in a series of Hail Mary passes by Papandreou to keep his hold on power, but the proposed referendum is really only a distraction from the no-confidence vote he faces, which is scheduled in Greek Parliament this Friday. As hard as the Europeans leaders may have fought to prevent a Greek default, they failed to take into account the dire state of domestic Greek politics. But even at this moment the solution to the crisis must be a European one.
On Fareed Zakaria GPS this Sunday, a fiery, must-see debate on the economy. Harvard’s Niall Ferguson locks horns with Columbia’s Jeff Sachs on Occupy Wall Street, the macro-economy and the first signs of good news from Europe.
Also this week: Fareed’s thoughts on his recent trip to Tehran – why President Obama has the wrong policy toward Iran. And, French philosopher Bernard Henri-Levy on a post-Gadhafi Libya, followed by Moneyball author Michael Lewis on what business can learn from… baseball.
The show airs Sunday at 10a and 1pET.
Jeff Sachs on the euro deal (video above)
Jeffrey Sachs: I think the euro is going to survive. And I think they took steps forward. And I think that they're going to let the euro fall down. So the divisions between Northern Europe and Southern Europe are real and serious. And I think they could be doing better than dancing at the edge, which is where they've been operating for more than two years. But they made progress this time around and there still, in fact, are a lot of details to be worked out in this agreement.
I do think that it shows that each time, when push comes to shove, they do step forward and they do get their act together to preserve the common currency. FULL POST
Editor's Note: Stephen S. Roach, a member of the faculty at Yale University, is Non-Executive Chairman of Morgan Stanley Asia and the author of The Next Asia.
By Stephen S. Roach, Project Syndicate
The United States has a classic multilateral trade imbalance. While it runs a large trade deficit with China, it also runs deficits with 87 other countries. A multilateral deficit cannot be fixed by putting pressure on one of its bilateral components. But try telling that to America’s growing chorus of China bashers.
America’s massive trade deficit is a direct consequence of an unprecedented shortfall of domestic saving. The broadest and most meaningful measure of a country’s saving capacity is what economists call the “net national saving rate” – the combined saving of individuals, businesses, and the government. It is measured in “net” terms to strip out the depreciation associated with aging or obsolescent capacity. It provides a measure of the saving that is available to fund expansion of a country’s capital stock, and thus to sustain its economic growth. FULL POST