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Why the Italian Crisis Matters

The economic failures of Portugal, Ireland, Greece, and Spain have been worrisome and damaging to the Eurozone. The troubles of Spain in particular are dangerous given the size and scope of its economy, and if it does indeed collapse it will send markets reeling but may still leave a salvageable endgame. The fact that the eurozone contagion is now pushing Italy to the precipice is much more dangerous. For some time, people have been somewhat worried about the prospect of an Italian economic collapse-- Italy is the seventh largest economy in the world and the third largest in Europe. Unlike the other troubled nations, Italy is too big to be bailed out. This is a problem as the likelihood of an Italian debt default has started to increase over the last week, with the Italian and European markets getting jittery over Italy's debt. Italy is the third most-indebted nation in the world, and holds the most debt of the European countries.

Italy's problem is different than Greece and Spain, though, and thus much more worrisome. It is a stable, good economy with strong industries that make it a global player, from Fiat to fashion to wine. Spain's economy involved centrally-planned job growth that had a lot to do with building infrastructure that now sits completed and unused, meaning a lot of money was spent giving people temporary jobs which they now cannot replace (in addition to other contagions within Spain). So, under its heavy debt, Spain doesn't have much going for it anyways at this point. Italy, though, is much different-- investors have every reason to trust in its economy. However, the massive debt of the Italian government has spooked them off, and like dominos it will hurt everything.

Even though the European Union, various European banks, and the Italian government are rushing to spare Italy from the chaos that has engulfed nations like nearby Greece, efforts are exasperated by a lack of confidence in the market and the current state of Italian politics. Last fall I lived in Italy, and I remember a rally thousands strong in the square outside of my Florentine apartment opposing hikes in college tuition prices-- I can only imagine the number of protestors and the level of anger now. On top of that, parliamentary infighting between scandal-plagued Italian Premiere Silvio Berlusconi and Finance Minister Giulio Tremonti has jittered the markets over concerns that the government will not be able to avert a default on their debt. Tremonti defiantly declared after a recent meeting on Belgium, "If I fall, so falls Italy," taking a shot at Berlusconi. He followed up with the real kicker, though- "If Italy falls, so does the Euro."

The Eurozone will not be able to sustain an Italian economic collapse, and the Euro--just a few years ago talked about as a possibility for replacing the dollar as the world currency--will become toxic. France, already looking more and more endangered, will likely follow Italy in economic collapse if their southern neighbor does fall down. The mighty economy of Germany, almost single-handedly holding up the entirety of the European Union, will not be able to hold up all of this weight. This will have a ripple effect on the entire world economy, and would likely reverse any progress made in the global recession. Indeed, it will return worse off than it was before, as both the United States and China, each facing their own problems, will not be able to sustain such blows in the global marketplace. The Italian crisis needs to be watched very, very carefully, and every effort made to avert collapse there.

It is interesting to note something a French national currently studying here in Washington told me the other day. For the longest time, the United States has always pointed to Europe and said that we cannot become them, highlighting our differences and thus why we are better off. In Europe, some political commentators would sometimes point to the United States a model economic and government systems. She says that now, though, the common line in France among radio and television personalities is pointing at the United States as a warning of things to come. France is relatively stable, but starting to shows cracks that would be broken open by an Italian default. They are now looking at both our federal government and our states like California, and using us now as an example of something to avoid rather than to follow. We are toxic. We are dangerous. We cannot be emulated on this current path we are on. In watching the crisis of the Eurozone unfold, America would do well not just to see it as a potential threat to us or something that may happen to us down the road-- America must realize that it is more of a reflection of our current woes. We're still in a lot of trouble, and if we don't swallow the hard medicine regarding our government expenditures soon, then we will join Italy and France alongside Greece and Ireland far sooner than we think.
Categories > Economy

Discussions - 3 Comments

Europe, like California and Illionis, is running out of other people's money. God Bless Margaret Thatcher.

You crack me up ROB.

The Euro won't fall or become toxic and neither will the dollar.

The Euro still has a good shot of replacing the dollar...

Pick a currency ROB? Maybe you like the Australian dollar, due to the strong mineral wealth of Australia...the Aussie Dollar can't replace the dollar or the Euro... You like the Yen? Japan has so much debt it isn't funny, and it has a real demographic crisis....not to mention bad luck in Earthquakes. You like the Swiss? They are so heavily invested in insuring Italy that that currency can't grow forever.

"We're still in a lot of trouble, and if we don't swallow the hard medicine regarding our government expenditures soon, then we will join Italy and France alongside Greece and Ireland far sooner than we think."


You like Gold and Silver?

You Think China is in a bubble?

You need to think in more relative terms... understanding that currencies are expressed in pairs...

You aren't allowed to hate all the pairs and think you are saying something coherent...

The dollar isn't going anywhere soon (within the next decade, anyways), even if we do default. If Italy collapses, the Euro's value will plummet. That would be particularly bad for Europe if the United States and China were not teetering on the brink either. Even if everything ended up okay and the Euro did eventually replace the dollar on the world stage, I still wouldn't care so long as we kept the dollar. The problem is that trust in money is inherently tied to trust in the government behind that money, and the mightiest governments in the world are starting to buckle under the weight of their expenditures, meaning that banks are going to start falling down like at the start of the recession and individuals are going to stop buying bonds and lending money, meaning we're back in a recession, this time probably worse than before due to the fact that none of the Group of Eight are prepared for such economic turmoil at the moment.

One of the best things can come from such a crisis as this is that maybe some EU nations will realize that the Euro was a silly idea to begin with. Everyone, including us, would be better off if the Irish had their Pound, the Italians their Lira, and the Germans their Deutschmark. It would allow the Europeans to recover faster and Germany to have kept its economic engine running well. A centrally-planned common currency in an area with such varied economies and rules and governments is just a bad idea, however good the intentions were.

Anyways, I'm hoping Berlusconi can be serious for just a little while and work out a deal to stop Italy from coming down-- there's still a chance of that, and success in Italy would likely allow the entire Eurozone to slowly stabilize. China is an entirely different problem, and more and more I don't think they'll be able to avert their coming crisis. I hope they do, but it is just seeming unlikely as much information comes out about it.

And I can hate all pairs if everyone is being stupid. The G8 nations are all suffering from the same problems caused by central banks and bloated governments. They should have learned in 2008 that it's time to deregulate and cut spending, but most everyone had the exact opposite reaction, and now there's a chance we'll all end up hurting for it as individuals stop investing and lending for fear of insolvency. The fact that gold is now trading over $1600 is a bad sign concerning people's trust in the ability of the major currencies to recover right now.

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