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Italy in the firing line

20 September 2011

9:17 AM

20 September 2011

9:17 AM

Markets sank into negative territory this morning, following Standand&Poor’s downgrade of Italy’s credit rating. (Although they have
since recovered.) The agency cut
Italy’s rating from A+/A-1+ to A/A-1
; it also kept its outlook as negative. The agency’s reasoning is
hardly surprising: growth is negligible, debt is unsustainable and Silvio Berlusconi’s inert government appears incapable of arresting the crisis.

Frail economics and supine politics, those twinned threats to prosperity, have struck again. The implications to the Eurozone, and the world economy, are obvious. An economist in Nomura’s
Sydney office told Reuters, “It only adds to the contagion risk over Greece and has encouraged the flight to safety in markets here.”


Over the past few weeks Greece has been the focus of attention, but the Italian downgrade may alter that. The threat of contagion invariably elicits calls for the introduction of Eurobonds and
“ever closer union”, both of which have been almost religiously resisted by Germany for political reasons.

Throughout this crisis, Angela Merkel’s government has emphasised the importance of Greece: save Greece and all will be well, seems to be its logic. This strategy has often been comically
myopic: only a few months ago, with Spanish and Italian bond yields soaring, the German deputy finance minister, Joerg Asmussen, denied that there was a crisis in the Eurozone, merely an issue of debt and
competitiveness in some peripheral areas.

The problem for Germany is that Greece looks to be beyond salvation. The country is currently trying to secure the next tranche of its EU/IMF loan, amounting to some £7 billion, despite
reneging on its commitments to reduce debt. Yesterday, the IMF called for Greece to embark on further budget cuts and improve tax collection, implying that it believes Greece’s challenges are
predominantly bureaucratic — bureaucracy being the grand cousin of grubby politics. The Wall Street Journal has an excellent account of Greece’s political intransigence, revealing that not one
civil servant has been laid off this year. Looking to the long-term, it’s surely only a matter of time before markets ask if Europe can be sufficiently economically dynamic when it is so
politically exhausted.


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