Alarms from Europe grow louder
Italy's Giulio Tremonti, left, speaks with Greece's Evangelos Venizelos at a meeting of European finance ministers in Brussels (July 11, 2011). Credit: AP
What's not to like about Italy? The food is great, the banks conservative, the people thrifty. Yet investors are poised to say "arrivederci, Roma," with potentially devastating consequences for the global economy.
In a scary sequel to the long-running Greek crisis, investors have discovered that Italy isn't a great bet either. Debt is excessive, growth slow or nonexistent, tax evasion rampant, government feckless. The Italian birthrate is so low that pensioners someday may have to look after one another.
And so the same drama begins anew, only this time filmed as a spaghetti western. European leaders ride to the rescue by launching more endless meetings and hollow reassurances. The imperiled nation rushes to embrace austerity. Pretty soon, on cue, someone will blame the whole thing on speculators, who are as reliably guilty in such sagas as the butler was in old-time whodunits.
But while it may look as if we've seen this movie before, the Italian version is much more frightening. Italy is the world's seventh-largest economy and one of its largest debtors, with well over $2 trillion in government IOUs outstanding. In other words, Italy isn't just too big to fail. It may be too big to bail out.
Unfortunately, we can't count on the Atlantic to protect us from any resulting financial tsunami. Half the assets of U.S. money market funds are invested in Europe, mostly in short-term securities issued by continental banks. And European banks are the ones most threatened by Italy's troubles.
Like the Greek crisis, this one is unlikely to have a happy ending -- especially if the powers that be on both sides of the Atlantic fail to recognize the magnitude of the problem. Think of it: A contagion seen as dangerous for threatening to spread from Greece to Portugal or even Spain has leapfrogged effortlessly to the eurozone's third-largest economy.
U.S. banks and regulators must harden our financial system against a potential euro-shock. Greece will likely default, and Italy has tipped into a parallel nosedive that will be accelerated by the budget-cutting it will now embrace. Big American banks need a thicker cushion of capital to protect against losses, even if accumulating it dampens lending and profits. And politicians in Washington must compromise on spending cuts and revenue increases to raise the debt ceiling, lest skittish investors start worrying about us the way they worry about Italy.
The European Central Bank, meanwhile, can only fire up the printing presses, issuing euros as needed to support Italy, Greece and others. Prayer might work as well. In retrospect it was madness to launch a unified currency across so many diverse nations without somehow unifying their public finances. Ultimately, Europe must establish a strong collective budgeting and borrowing mechanism -- even if this entails further subsidies from taxpayers in solvent lands like Germany to those in strapped nations such as Greece. Either that, or throw in the towel on the whole ill-conceived enterprise.
