FacebookTwitterGoogle+RedditEmail

Economic Mismanagement in Europe

by MARK WEISBROT

Some of us have been warning for months about the crisis scenario that is accelerating today in Europe. In particular I have noted that the European authorities were pushing Italy down a dangerous path, similarly to what they did to Greece. The formula is deadly: force budget tightening on an economy that is already shrinking or on the edge of recession.  This shrinks the economy further, causing government revenue to fall and making further tightening necessary to meet the target budget deficit. The government’s borrowing costs rise because markets see where this is going.  This makes it even more difficult to meet the targets, and the whole mess can spiral out of control.

Today financial markets reacted violently to this process in Italy, with yields on both 10-year and 2-year Italian government bonds soaring past 7 percent. Let’s do the math.

One year ago, Italy could borrow at 4 percent for 10-year bonds.  Today these yields went as high as 7.7 percent.  Multiply this difference, 3.7 percent, times the 356 billion euros ($491 billion) that Italy has to refinance over the next year.  That’s 13.2 billion euros ($18.2 billion) in additional borrowing costs, or about 1 percent of Italy’s GDP.

Italy has agreed to deficit reduction of 3.9 percent of GDP by 2013, with about 1.7 percent of it coming over the next year.  Prime Minister Silvio Berlusconi has just announced he will resign, in part because of the political difficulty of making these changes in a weak economy.  Now add another 1 percent of GDP to make the same target – and that the target will move because the economy will likely shrink further – and you can imagine that Italy is not going to make these targets, which is what the bond markets are imagining right now.

In fact, the bond traders can be more imaginative than that.  They have noticed that when Portugal and Ireland’s bond yields went above 7 percent, they quickly soared into the double digits. These governments were then forced to borrow from the IMF and the European authorities instead of relying on financial markets.

The European authorities are not prepared to deal with such a situation. Italy is the world’s eighth largest economy, and its $2.6 trillion debt is much more than that of Ireland, Portugal, Greece and even Spain combined.  Clearing houses in Europe have recently begun to require more collateral for Italian debt, which has also unnerved markets.  A lot of Italy’s debt is held by European banks, and the fall in Italy’s bond prices also causes problems for their balance sheets, increasing the risk of a worsening financial crisis that is already slowing the world economy.

What can be done about this? The European Central Bank (ECB) reportedly intervened heavily in the Italian bond market, and its purchases are probably what brought Italy’s bond yields down somewhat from their peaks.  But this is not nearly enough to resolve the crisis.

The ECB is the main problem. It is run by people who hold extremist views about the responsibility of central banks and governments in situations of crisis and recession.  Even as facts contradict them on a daily basis, they cling stubbornly to the view that further budget tightening will restore the confidence of financial markets and resolve the crisis.

Governments must take “radical measures to consolidate public finances,” said ECB Executive Board member Jurgen Stark yesterday.

But of course these measures will only pour more fuel on the fire, by pushing Europe further toward recession and exacerbating the debt and budget problems of the weaker eurozone economies.

And the new head of the ECB, Mario Draghi, just a week ago dismissed the idea of the central bank playing the role of lender of last resort – a traditional role for central banks.

ECB authorities think they have already done too much by buying $252 billion of eurozone bonds over the past year and a half.  But compare this with the U.S. Federal Reserve, which has created more than $2 trillion since 2008 in efforts to keep the U.S. economy from sinking back into recession.

The ECB could put an end to this crisis by intervening in the way the U.S. Federal Reserve has done in the United States. But they continue to insist that this is not their role.  That is the heart of the problem, and until this policy is reversed it is likely that the European economy will continue to worsen.

 

This article originally appeared in Guardian.

Mark Weisbrot is co-director of the Center for Economic and Policy Research, in Washington, D.C. and president of Just Foreign Policy. He is also the author of  Failed: What the “Experts” Got Wrong About the Global Economy (Oxford University Press, 2015).

More articles by:

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

Weekend Edition
March 24, 2017
Friday - Sunday
Michael Hudson
Trump is Obama’s Legacy: Will this Break up the Democratic Party?
Eric Draitser
Donald Trump and the Triumph of White Identity Politics
Jeffrey St. Clair
Roaming Charges: Nothing Was Delivered
Andrew Levine
Ryan’s Choice
Joshua Frank
Global Coal in Freefall, Tar Sands Development Drying Up (Bad News for Keystone XL)
Anthony DiMaggio
Ditching the “Deep State”: The Rise of a New Conspiracy Theory in American Politics
Rob Urie
Boris and Natasha Visit Fantasy Island
John Wight
London and the Dreary Ritual of Terrorist Attacks
Paul Buhle
The CIA and the Intellectuals…Again
David Rosen
Why Did Trump Target Transgender Youth?
Vijay Prashad
Inventing Enemies
Ben Debney
Outrage From the Imperial Playbook
Michael J. Sainato
Bernie Sanders’ Economic Advisor Shreds Trumponomics
Bill Willers
Volunteerism; Charisma; the Ivy League Stranglehold: a Very Brief Trilogy
Lawrence Davidson
Moral Failure at the UN
Pete Dolack
World Bank Declares Itself Above the Law
Nicola Perugini - Neve Gordon
Israel’s Human Rights Spies
Patrick Cockburn
From Paris to London: Another City, Another Attack
Ralph Nader
Reason and Justice Address Realities
Ramzy Baroud
‘Decolonizing the Mind’: Using Hollywood Celebrities to Validate Islam
Colin Todhunter
Monsanto in India: The Sacred and the Profane
Louisa Willcox
Grizzlies Under the Endangered Species Act: How Have They Fared?
Norman Pollack
Militarization of American Fascism: Trump the Usurper
Pepe Escobar
North Korea: The Real Serious Options on the Table
Brian Cloughley
“These Things Are Done”: Eavesdropping on Trump
Sheldon Richman
You Can’t Blame Trump’s Military Budget on NATO
Carol Wolman
Trump vs the People: a Psychiatrist’s Analysis
Stanley L. Cohen
The White House . . . Denial and Cover-ups
Farhang Jahanpour
America’s Woes, Europe’s Responsibilities
Joseph Natoli
March Madness Outside the Basketball Court
Bruce Mastron
Slaughtered Arabs Don’t Count
Pauline Murphy
Unburied Truth: Exposing the Church’s Iron Chains on Ireland
Ayesha Khan
The Headscarf is Not an Islamic Compulsion
Ron Jacobs
Music is Love, Music is Politics
Christopher Brauchli
Prisoners as Captive Customers
M. Shadee Malaklou
An Open Letter to Duke University’s Class of 2007, About Your Open Letter to Stephen Miller
Robert Koehler
The Mosque That Disappeared
Franklin Lamb
Update from Madaya
Dan Bacher
Federal Scientists Find Delta Tunnels Plan Will Devastate Salmon
Barbara Nimri Aziz
The Gig Economy: Which Side Are You On?
Kollibri terre Sonnenblume
Marines to Kill Desert Tortoises
Louis Proyect
What Caused the Holodomor?
Max Mastellone
Seeking Left Unity Through a Definition of Progressivism
Charles R. Larson
Review: David Bellos’s “Novel of the Century: the Extraordinary Adventure of Les Misérables”
David Yearsley
Ear of Darkness: the Soundtracks of Steve Bannon’s Films
FacebookTwitterGoogle+RedditEmail