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Italy pushed to the brink by ECB fiscal orthodoxy [View All]

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CHIMO Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Nov-10-11 07:37 PM
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Italy pushed to the brink by ECB fiscal orthodoxy
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Some of us have been warning for months about the crisis scenario that is accelerating today in Europe. In particular, I have noted that the European authorities were pushing Italy down a dangerous path, in similar fashion to what they did to Greece. The formula is deadly: force budget tightening on an economy that is already shrinking or on the edge of recession. This shrinks the economy further, causing government revenue to fall and making still further tightening necessary to meet the target budget deficit. The government's borrowing costs rise because markets see where this is going. This makes it even more difficult to meet the targets, and the whole mess can spiral out of control.

Wednesday, financial markets reacted violently to this process in Italy, with yields on both ten-year and two-year Italian government bonds soaring past 7%. Let's do the math.

One year ago, Italy could borrow at 4% for ten-year bonds. Today, these yields went as high as 7.7%. Multiply this difference, 3.7%, by the €356bn ($491bn) that Italy has to refinance over the next year. That's €13.2bn ($18.2bn) in additional borrowing costs, or about 1% of Italy's GDP.

ECB authorities think they have already done too much by buying $252bn of eurozone bonds over the past year and a half. But compare this to the US Federal Reserve, which has created more than $2tn since 2008 in efforts to keep the US economy from sinking back into recession. The ECB could put an end to this crisis by intervening in the way the US Federal Reserve has done in the United States. But they continue to insist that this is not their role. That is the heart of the problem, and until this policy is reversed, it is likely that the European economy will continue to worsen.
http://www.guardian.co.uk/commentisfree/cifamerica/2011/nov/09/italy-pushed-brink-ecb-fiscal-orthodoxy
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