The next crisis candidate: Italy

June 13, 2012 | Filed under: Europe,Finance | Posted by:
Euro coin against the Italian flag

Economy

The next crisis candidate: Italy

After Spain, Italy is now under increased pressure. The Austrian finance minister believes the eurozone’s third-largest economy will have to ask the EU for financial help.

Following Spain’s financial tribulations, it is now Italy’s turn. The eurozone’s third-largest economy will be forced to ask the EU for financial help, the Austrian finance minister said. Italian Prime Minister Mario Monti’s shine has rubbed off.

Italy has to pay higher interest rates each time it requests new money. On Tuesday, the government had to shore up government bonds with rates of up to 6.66 percent. Investors are trying to sell their Italian paper, and trade is flourishing in credit default swaps. The Monti government is feeling the pressure.

Mariano Rajoy’s government in Madrid has been forced to accept it is unable to save its embattled banks without help from Brussels. Austrian finance minister Maria Fekter doesn’t rule that option out for Rome, either. Speaking on Austrian television on Monday, she said that Italy would first have to make every effort to pull itself out of its own debt crisis.

Another dimension

If Italy were to follow Spain in asking for help from the EU, it would raise the European debt crisis to a new level. But a comparison of the Spanish and Italian problems reveals some significant differences.

In an interview with DW, Jürgen Pfister, chief economist at Bayern LB, said “Italy doesn’t have a banking problem, because it had no real estate bubble burst like Spain.” Rome’s current difficulties are due in part to a decline in economic output. And that, Pfister said, is the result of austerity measures by Monti’s government.

But with all its efforts to reduce the deficit, Italy has made great progress in comparison with Spain, he said. Italy can aim for a two percent deficit, while “if we’re lucky, Spain could come in close to 6.5 percent.”

There are other reasons why Rome is in a better position than Madrid to get its problems under control, Pfister said, including the competitiveness of the Italian economy and the country’s more developed industrial structure.

In the shadow of elections

The current Italian “government of technocrats” took office amid great expectations – expectations that Pfister said it was not able to meet. And even a government of technocrats must ultimately worry about being re-elected if it wants to be able to do its work over a long period of time. The upcoming election next year is casting a shadow over the Monti cabinet, he said.

Unlike Maria Fekter, Jürgen Pfister doesn’t think that Rome has to ask for European help. He is convinced Italians are able to sort their problems out. And if not? Then the eurozone has a bigger problem: “The rescue package, even in its expanded form, would not suffice for Italy.”

Author: Dirk Kaufmann / jlw
Editor: Simon Bone

source: DW