What’s in the news today? More of Europe’s attempts to ignore its own breakdown.
Now Papandreou is gone and the Greeks are trying to put together a new coalition government with more credibility. At least, that’s what the newspapers tell us. For our part, we don’t believe the new government will have any more credibility than the old one. Why would it? Papandreou was not a bad egg. He was just in an impossible situation. And that situation hasn’t changed.
“In Greece, the developments are cataclysmic,” said Wolfgang Schauble, German Finance Minister. “Every day it’s a new problem.”
Right. And Greece was yesterday’s problem.
Today, Italy is the problem du jour. Or, perhaps we should say the problem di giorno. Analysts make comparisons and contrasts. Both Italy and Greece have olive trees. Both produce wine. Both have sunny weather and nice beaches. And both have a credibility problem. But only Greece has a real “point of no return” debt problem.
Italy’s debts really aren’t so bad. Yes, it has government debt-to-GDP of 120%. But its household sector has little debt, only 40% of GDP compared to 75% across the Eurozone. This is attributed to the fact that so much of the economy is ‘off-the-books’…cash and carry. When you cash and carry you don’t have much debt. At least, not in Italy. The Italians know how to operate an off-the-books economy…and how to collect debts.
But they don’t collect taxes very well. Cheating on one’s taxes is a point of honor among Italians. After all, they are a very civilized people. They care about their pasta and their bunga-bunga parties. As for taxes, they know tax money is squandered. They prefer to squander it themselves.
Many Italians earn money in ways that never appear on the nation’s accounts. That’s why Italy is probably a much richer country than the numbers suggest. Much of the output is never recorded…and never taxed. You have to admire a people who can do that.
The problem in Italy, say the papers, is that investors have lost faith in the government. It’s not surprising to us. What is amazing to us that they ever had any faith in the government in the first place. Governments are not to be trusted; every thinking person knows that.
Italy has a deficit only half the size of the US deficit. Its problem is that it needs to roll over a quarter of its debt in the next couple of years. That would be no problem — because Italy can afford it — as long as interest rates remain low. But when investors lose faith in the government’s ability or willingness to squeeze taxpayers on their behalf…things begin to fall apart. Last time we looked, Italian 10-year bonds were yielding 6.66%. That has a sinister sound to it. And it has a deadly look about it.
The Financial Times says Italy is in the “danger zone.” Silvio Berlusconi vows to “fight on”…but it looks like the war may be already lost.
But who knows? Every day is a new problem. And exactly the same old problem. The world has too much debt. All the sturm and drang in Europe…as in America…is really about who pays it, how, and when.