The Financial Times has said on many occasions:
“Italy is too big to fail and too big to save!”
The proposed government there is being formed from the 2 democratically elected parties, the anti-establishment 5-Star Movement and right-wing League. The New York Times has as its headline today: “Economists See Potential Nightmare in New Italian Government”!
Italy already has debt that is 132% of GDP, and by comparison, U.S. debt is about 105% of GDP and Germany’s 68%. The new parties have plans to introduce a basic income for the poor and a 2-tier flat tax. They also want to cancel scheduled increases in sales tax, and remove some tax on car fuel, but the most worrying is their ambition to remove the recently passed pension reforms.
These could cost, according to economists, some 10% of GDP!
Their banking system has very high default rates, the mafia is still active in politics, labor market reforms and prolific public spending has been a characteristic for the last 4 decades…
It is no wonder that the Martin Wolf made the above statement, and goes on further to see that the Italy’s attempts to crash out of the Euro would create havoc in Europe.
So much for the Banking Union, so much for the Capital Markets Union, so much for the grandiose efforts of Mr. Draghi, of the European Central Bank, to drag Finland and other countries into risk sharing schemes for the debt issued by Euro Zone members states.
All of the above are serious issues that need to be discussed openly and not hidden away from sight as appears to be the policy of our present government.
Any crisis from Italy will impact France, Germany and Spain because they are major trading partners and many of their banks have huge exposure on Italy, as does the European Central Bank.
As noted above, there are big discussions ongoing and they must be opened up through the media to ordinary people because ordinary tax-payers are exposed through their governments and through their jobs.
A major Italian crisis will cause a big fall in our economies and cause unemployment. So far Germany, Finland, the Netherlands have resisted calls for risk-sharing of banks across the Euro Zone, and risk-sharing of sovereign debt – à la Greece!
The European Central Bank (EBC) is now pushing hard for Sovereign bond-backed Securities (SBBS) as a way forward but this should be completely resisted until the big countries comply with simple Maastricht Treaty rules (German, France, Spain Italy, etc just do not care)! These SBBS ideas suit the private banks as a great way to make money, and it suits the EBC who desperately want to sell off the €2 trillion holdings of government bonds they have purchased to keep interest rates down in their QE = Quantitative Easing program! Their interest rate risk and credit risk is getting worse by the day as the price of Spain and Italy bonds sink with the recent bad news…
The markets are not for weak hearts and in the coming months we will certainly see some serious problems emerging again, that may spread like an Ebola virus.