“I believe, no,” is how Italian Prime Minister Mario Monti answered
the question if Italy would seek a bailout—lacking the bravado and
vehemence with which Spanish Prime Minister Mariano Rajoy had claimed
for the longest time that Spain wouldn’t need one. Until it needed one.
The question was hot. It followed the kerfuffle that ensued when
Austrian Finance Minister Maria Fekter had let it slip Monday that
Italy, given the high rates it has to pay on its debt, might also need
“support.”
Monti was addressing restive German taxpayers on Bavarian public
radio: He understood that Germans were looking at Italy as “a merry and
undisciplined country,” but Italy was much more disciplined than other
countries, he said, and wasn’t all that merry.
Italy is paying twice, he said: for the bailouts of other countries and
very high rates for its own sovereign debt. Germany pays only once,
namely for the bailouts, because it pays practically no interest on its
debt. But he promised his German listeners: “The budget deficit this
year will be low, only 2%.” And next year, a surplus is scheduled. “The
country is changing,” he said.
A full-fledged bailout of Italy is a theoretical construct, anyway.
As the third largest economy in the Eurozone, it’s too big to get bailed
out by the Eurozone. Of the 17 member states, five, if Cyprus is
included, are already being bailed out. Leaves 12, including teetering
Italy, to pay for them. If Italy falls, the two major countries left
standing to bail all of them out would be Germany and France. An
impossibility.
And Italy is desperate. “Schnell, Frau Merkel,” screamed the front-page headline of the Italian business daily Il Sole 24 Ore.
“Hurry up, Ms. Merkel,” an open letter to German Chancellor Angela
Merkel, was a plea to do what it would take to save Italy—and thus the
Eurozone. “Great Germany is losing its sense of history ... and
solidarity with European partners,” the article admonished, despite the
hundreds of billions of euros that German taxpayers already committed to
the bailouts. It called for immediate action, which would be in
Germany’s own interest, and had “at least three” demands:
1. European-wide deposit insurance. Problem: it doesn’t exist yet,
and no bank has paid into the fund; thus, it would be taxpayers,
particularly Merkel’s voters, who’d have to transfer their wealth to
bail out banks and depositors in other countries.
2. Give banks direct access to the bailout fund EFSF. Problem: it
was sold to voters as a bailout mechanism for countries, not
corporations.
3. Unification of bond yields via Eurobonds. Cost of borrowing would
be the same for all countries, raising it for Germany and France, and
lowering it for Spain and Italy. A bit “more complicated” to implement,
it would require constitutional reforms of all countries as they would
give up part of their national sovereignty. A “European constitution”
would have to seal it. “Leaders in every country, including France and
Germany, must have the strength to convince their electorates of the
short- and medium-term benefits.”
And it threatened Germany with economic demise, having learned how to
do that from Greece: “Germany cannot maintain its health and strength
amid the debris of small and large European countries.” Wondrous
benefits, on the other hand, would emerge from a political and fiscal
union—run by bureaucrats in Brussels, I presume: Europe would suddenly
become “a fierce competitor” that would be able to “ensure income and
jobs for a new generation.” If not, “you”—that’s Ms. Merkel—“would be
overwhelmed by a spiral of defensive interventions that jump from one
country to the next.” And it concluded, “It’s clear to everyone that the
United States of Europe is a reality.... Faccia presto, signora Merkel.”
It would be a debt and transfer union. Debt would be transferred into
one direction and wealth into the other—unless strict controls were
instituted. If countries were to guarantee the debt of other countries,
guarantors would have to be able to control how much can be borrowed; or
else, Greece for example, could borrow cheaply and without limit while
someone else would ultimately have to pay off its debt. So, any kind of
common debt, be it Eurobonds or other instruments, would require a
supra-national entity that decides to what extent a country is allowed
to borrow.
Once the budget is in deficit, elected national representatives would
lose their ability to fund infrastructure projects, boondoggles,
subsidies, corporate handouts, wars ... a fundamental democratic
activity, messy as it can be. Instead, they’d have to go begging to the
board of bureaucrats who speak different languages and hail from
different countries. That board would wield enormous power over each
country as it decides what gets funded and what doesn’t, based on whim
or political persuasion. National politicians do that too, but they’re
part of the country and have to run for reelection.
The US had hundreds of years and a civil war to figure out how to
manage its common good. The Eurozone is a group of 17 independent
nations with ancient cultures. Uniting them into a federal arrangement
will take decades, if it’s even possible. But the debt crisis is here
now. Italy is running out of options. Spain is hopelessly in trouble.
Greece has hit the wall. And turning that fiasco overnight into a
healthy United States of Europe is an illusion.
In Greece’s chaotic wake bobs the Republic of Cyprus, the fifth
Eurozone country to get a bailout. A massive banking scandal, tight
connections to Greece, corruption, too much debt, and a lousy economy
took it down. But tiny Cyprus has one thing—and it’s huge—that other
debt sinner countries don’t have.Source
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