FacebookTwitterGoogle+RedditEmail

Economic Mismanagement in Europe

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.

More articles by:

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).

January 21, 2019
W. T. Whitney
New US Economic Attack Against Cuba, Long Threatened, May Hit Soon
Jérôme Duval
Macronist Repression Against the People in Yellow Vests
Dean Baker
The Next Recession: What It Could Look Like
Eric Mann
All Hail the Revolutionary King: Martin Luther King and the Black Revolutionary Tradition
Binoy Kampmark
Spy Theories and the White House: Donald Trump as Russian Agent
Edward Curtin
We Need a Martin Luther King Day of Truth
Bill Fried
Jeff Sessions and the Federalists
Ed Corcoran
Central America Needs a Marshall Plan
Colin Todhunter
Complaint Lodged with European Ombudsman: Regulatory Authorities Colluding with Agrochemicals Industry
Manuel E. Yepe
The US War Against the Weak
Weekend Edition
January 18, 2019
Friday - Sunday
Melvin Goodman
Star Wars Revisited: One More Nightmare From Trump
John Davis
“Weather Terrorism:” a National Emergency
Jeffrey St. Clair
Roaming Charges: Sometimes an Establishment Hack is Just What You Need
Joshua Frank
Montana Public Schools Block Pro-LGBTQ Websites
Louisa Willcox
Sky Bears, Earth Bears: Finding and Losing True North
Robert Fisk
Bernie Sanders, Israel and the Middle East
Robert Fantina
Pompeo, the U.S. and Iran
David Rosen
The Biden Band-Aid: Will Democrats Contain the Insurgency?
Nick Pemberton
Human Trafficking Should Be Illegal
Steve Early - Suzanne Gordon
Did Donald Get The Memo? Trump’s VA Secretary Denounces ‘Veteran as Victim’ Stereotyping
Andrew Levine
The Tulsi Gabbard Factor
John W. Whitehead
The Danger Within: Border Patrol is Turning America into a Constitution-Free Zone
Dana E. Abizaid
Kafka’s Grave: a Pilgrimage in Prague
Rebecca Lee
Punishment Through Humiliation: Justice For Sexual Assault Survivors
Dahr Jamail
A Planet in Crisis: The Heat’s On Us
John Feffer
Trump Punts on Syria: The Forever War is Far From Over
Dave Lindorff
Shut Down the War Machine!
Glenn Sacks
LA Teachers’ Strike: Student Voices of the Los Angeles Education Revolt  
Mark Ashwill
The Metamorphosis of International Students Into Honorary US Nationalists: a View from Viet Nam
Ramzy Baroud
The Moral Travesty of Israel Seeking Arab, Iranian Money for its Alleged Nakba
Ron Jacobs
Allen Ginsberg Takes a Trip
Jake Johnston
Haiti by the Numbers
Binoy Kampmark
No-Confidence Survivor: Theresa May and Brexit
Victor Grossman
Red Flowers for Rosa and Karl
Cesar Chelala
President Donald Trump’s “Magical Realism”
Christopher Brauchli
An Education in Fraud
Paul Bentley
The Death Penalty for Canada’s Foreign Policy?
David Swanson
Top 10 Reasons Not to Love NATO
Louis Proyect
Breaking the Left’s Gay Taboo
Kani Xulam
A Saudi Teen and Freedom’s Shining Moment
Ralph Nader
Bar Barr or Regret this Dictatorial Attorney General
Jessicah Pierre
A Dream Deferred: MLK’s Dream of Economic Justice is Far From Reality
Edward J. Martin
Glossip v. Gross, the Eighth Amendment and the Torture Court of the United States
Chuck Collins
Shutdown Expands the Ranks of the “Underwater Nation”
Paul Edwards
War Whores
FacebookTwitterGoogle+RedditEmail