Alarm Bells Ring For Eurozone: The Crises In Greece And Italy – Analysis

By Mustafa Kutlay

Greece has slipped into political chaos after its prime minister, Mr. George Papandreou, initially decided to hold a referendum and then was forced to withdrawal following a fierce reaction led by Germany and France.

Mr. Papandreou paid for his attempt to hold a referendum by losing office. During interparty talks held by the Greek president, New Democracy, the main opposition party, determined that fresh general elections should be held. A caretaker coalition has been agreed to lead the country until February 19, the date when they are due to be held. Mr. Papandreou announced that he was not a candidate for office in the coalition government and thus lost the political gamble that he had taken.

 

In theory, setting up a coalition government should show Greece the way to the right decisions. This is because the economic crisis gripping Greece is a problem which cannot be resolved by an initiative taken by just one country. The rescue package which the EU prepared for Greece at the end of October contains conditional clauses which include unpopular measures such as reducing the number of civil servants; a further €15 billion worth of privatizations on top of the €50 billion in the previous package; additional income taxes and cuts on retirement pensions. Tough measures like these require the taking of some kind of social consensus. Political agreement on this matter is vital.

Technocrat Government for Greece

However, there is extensive debate within Greece about how successful the proposed technocratic government will be because it will have insufficient time for the general restructuring envisaged and the seriousness of the crisis makes its chances of success questionable. The table below shows that the earliest date at which the Greek economy could resume growth is 2013, and public indebtedness by then could rise from 142% of GDP to 190%. The EU’s latest rescue package contained various improvements which might partially invalidate this picture, but with the political crisis in Greece this package has been put on hold. Even if a technocrat government is set up and begins to implement it, there is a low probability that the markets will respond positively to this belated and inadequate package.

This picture suggests whatever type of government there is in Greece, the country will find it very hard to get out of the crisis as long as it stays in the eurozone. Consequently, in both Greek politics and the European media there is now open discussion of the possibility that Greece will abandon the euro.  Although Mr. Papandreou said that Greece would do whatever was necessary to stay within the eurozone, there is nothing much that Greece can do further to this end and the coalition government may not succeed in keeping the country in the eurozone.

But of course, Greece is not the only problem for the eurozone. Indeed, it might be described as just the visible tip of the iceberg. The fault line which was triggered by the political instability in Greece carried on into Italy, and has pushed all the southern European countries of the EU into bankruptcy. The most immediate threat is Italy

Where to with Berlusconi?

Everyone knows that Italy has an economy which rests on insecure foundations, as well as a corrupt public administration and undisciplined political rule. But these are not sufficient for it to be labeled as the new Greece. Italy also possesses a strong financial system compared to Greece. a diversified manufacturing sector, and a budget deficit running at a controllable level.

Despite all these things Italian levels of indebtedness have reached horrific levels. Italy’s total debt is around €1.9 trillion, equivalent to 120% of the size of the Italian economy. In other words, Italy has a debt equivalent to more than three times the total indebtedness of Greece, Ireland, and Portugal and the Italian economy makes up 17% of the eurozone.

It is the third largest national economy in the EU after Germany and France, roughly three times the total size of the countries which have asked for rescue packages, i.e. Greece, Portugal, and Ireland. The €130 billion rescue package allotted to Greece to cover three years of its debt obligations is an amount which would last just six months in the case of Italy. This comparison indicates very starkly the scale of the disaster that might be endured if Italy goes the way of Greece.

Political Responsibility: The Need for a Kamikaze Government

It has to be conceded that it is too late for Greece. As long as Greece’s small economy stays in the eurozone, it looks unlikely that it will be able to cope with the enormous problems it is facing. Up till now, European leaders have acted in a very miserly fashion but they would make a good start if they could begin by recognizing this reality and proceeded to the formulating of a realistic strategy thus demonstrating their political discernment.

Italy’s position however is very different because to discuss Italy means, no hesitation about it, discussing the future of the eurozone. European leaders have to display their political responsibility on this subject and where necessary “Kamikaze governments” have to be established. Berlusconi proclaiming that he will resign by no means implies that Italy’s problems have been solved. Speedily setting up a new and strong government and so not giving an opening to political chaos may draw away the fire from the markets. But it is quite impossible for problem countries within the euro region to put out messages by themselves that they have brought their affairs under control.

To sum up, the need is for all the countries, particularly the large ones led by Germany and France, to act in a united and determined fashion. This is the only way to prevent the crisis in Italy getting deeper and threatening the entire eurozone. Should the eurozone collapse, then the world economy would enter a long and deep depression, realizing the managing director of the IMF’s remarks about a lost decade.

For further research please see an additional article by the Author via this link.