Guardian UK: Italy pushed to the brink by ECB fiscal orthodoxy

[marmar]

Italy pushed to the brink by ECB fiscal orthodoxy
The European Central Bank's insistence on budget-tightening in a recession has forced Italy's finances into a deadly spiral

Mark Weisbrot
guardian.co.uk, Wednesday 9 November 2011


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, in similar fashion 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 still 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.

Wednesday, financial markets reacted violently to this process in Italy, with yields on both ten-year and two-year Italian government bonds soaring past 7%. Let's do the math.

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

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

The complete piece is at: http://www.guardian.co.uk/commentisfree/cifamerica/2011/nov/09/italy-pushed-brink-ecb-fiscal-orthodoxy

[Autumn]

1. Sounds familiar.

" 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."

and over the cliff

[Sarah Ibarruri]

2. That's what they get for imitating the wrongs in the U.S. nt