Wednesday, 13 July 2011
Eurozone in panic: Is Italy next domino to fall?
With the paralysis in the country's government likely to prevent decisive action to confront the crisis, some are saying Italy is perhaps days away from becoming an economic failed state. And unfortunately it is not too big to fail, but it is too big for the EU to bail out.
Such extreme rhetoric may or may not be justified, depending on who you talk to. But the risk is extreme. The countries that have so far fallen victim to the debt crisis and required an EU bailout – Portugal, Ireland and Greece – are relatively tiny and their debt makes up less than 5% of overall eurozone public debt. If worse came to worse, France and Germany could afford to buy back all of their debt combined.
anxious and frustrated over Europe's inaction.
The markets are demanding that Italy rapidly put in place a set of drastic austerity measures like Spain did, but getting these through the country's broken political system will be a difficult task. Silvio Berlusconi's government is in complete disarray and he is clinging to power by just one or two votes following a series of sex and corruption scandals. Italy's president made a public plea for the country's politicians to put aside their differences and vote through these austerity measures in the next few days to save the country. But it remains to be seen whether anyone will be able to hear his call above all the shouting happening in the Italian parliament at the moment.
Emergency summit this week
Add to this the news today that Ireland's credit rating has been slashed to junk status and Greece is edging toward a default and you've got real panic happening here in Brussels. The mood at the finance ministers meeting yesterday was dire. An emergency summit of Eurozone country leaders may be called in the next few days to deal with the crisis, which has the potential to spin out of control by next week.
Time is rapidly running out. While Italy and Spain are still afloat, it is still possible for the Eurozone to take extreme action to prop up the three collapsed economies and prevent contagion. But once Italy or Spain falls it will be too late – the Eurozone would not be able to bail them out or buy their debt. And who knows what might come next.