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Tuesday, September 23, 2014 12:36 PM

Miracle Not Enough to Save Italy; Disruptive Eurozone Breakup Awaits

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Analysis of what's happening and what to do about problems are two different things.

Financial Times writer Wolfgang Münchau provides an excellent example in Italy Debt Burden is a Problem For Us All.

Münchau's opening gambit is "We need extreme and co-ordinated policy to make it possible for Italy to ultimately stay in the eurozone."

Münchau states, "I think it is high time to address the consequences of failure with more clarity than is usually done. Put bluntly, Italy’s economic position is unsustainable and will result in eventual debt default unless there is a sudden and durable change in economic growth. At that point, Italy’s future in the eurozone would also be in doubt – and indeed the future of the euro itself."

High Time For Honest Assessment

Actually, it is indeed "high time" for something. What we need is an honest assessment from political leaders and euro puppets that the euro is doomed.

The flaws of the euro are well understood. I am 100% certain that Münchau could write a playbook on them with ease.

Münchau even admits that it would be "naive" to believe economic reforms can save Italy.

"The economic adjustment needed goes much beyond a few structural reforms. Italy needs changes in the legal system, it needs to bring taxes down to the eurozone average, and to improve the quality and efficiency of the public sector. It needs, in other words, to change the entire political system. Even that may not be enough."  

According to Münchau (and I wholeheartedly agree), Italy needs economic reform, a new legal system, lower taxes, less government spending, pension reform, and more productivity. And even that might not be enough! 

Nonetheless, to support his political beliefs, he seeks a miracle.

Miracle Requested

"I could see the ECB buying a wide range of debt instruments, starting with asset-backed securities and covered bonds as already announced. On top of that, it could buy other types of financial securities – bonds from the European Stability Mechanism, the eurozone’s rescue umbrella, and from the European Investment Bank. The Commission could use the EIB to launch a big programme of infrastructure bonds. The best hope for Italy is that some of that trickles down into the real economy. I am optimistic that these programmes will have a noticeable positive effect on the eurozone as a whole, but much less certain of their effect on Italy."

Miracle Might Not Be Enough!

Münchau asks for that set of miracles from the ECB, yet is "less certain of their effect on Italy". Why? because "radical reform is not enough".

Note the irony in Münchau's conclusion "Italian debt sustainability requires policies at eurozone level that have so far been ruled out. This is where the eurozone’s success or failure will be decided."

Eurozone Already Failed

Spain's unemployment rate is close to 25%. Its growth and unemployment prospects are nil.

Spain has no chance of meeting budget targets. Nor do France and Italy. Greece and Cyprus are in depressions. France is waiting on deck with problems as big as Italy's.

Any thinking person with an ounce of common sense he would readily admit the eurozone has already failed and it cannot and will not be revived by wishful thinking.

Miracles are not coming. However, there are choices, all of them unpalatable, to the eurozone nannycrat.

Eurozone Choices

1. Voluntarily dismantle the eurozone in the least destructive manner
2. Dismantle the eurozone by populist choice with huge financial disruptions
3. Suffer through decades of stagnant growth and extremely high unemployment

Option 4, pray for a miracle is not a logical choice.

Unless done voluntarily, it's easy to predict what will eventually happen: After suffering long enough in option 3, a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and declare all the bailouts and debt foisted on their country to be null and void. That person will be elected.

What to Do About It

No miracle can keep the eurozone project intact. If Münchau was honest with himself, he would admit it.

The only thing that makes any sense to do is dismantle the eurozone, by choice, before someone like Marine Le Pen in France, Beppe Grillo in Italy, or an unknown person in Spain or elsewhere does it by force.

Disruptive Eurozone Breakup Awaits

Instead of seeking miracles that won't work and are not coming in the first place, how about an honest dialog on the best way to break up the eurozone?

Unfortunately, that will not happen because it is politically unacceptable.  A disruptive breakup of the eurozone awaits.


Reader Marian states "If indeed Italy's problems are it's legal system, tax rates, quality and efficiency of the public sector, then simply dissolving the EU, even in an orderly way, would not address these fundamental issues."

Marian is of course correct! But why should the rest of Europe have to suffer with bailing out Italy when that approach cannot possibly fix the problem?

Can-kicking exercises only make the problem worse for all involved. By dissolving the eurozone, countries would be forced to address the real issues instead of praying for miracles from the ECB.

Mike "Mish" Shedlock

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