€urosclerosis: Italy’s austerity plan

From


Monti Unveils Austerity Plans


By Stacy Meichtry and Marcus Walker

ROME—Italy’s new government unveiled austerity measures that this week could form the first part of a wider European deal leaders and markets hope could be a turning point in the battle to save the euro.

Italian Prime Minister Mario Monti, in his first test since taking office two weeks ago, outlined a three-year plan made up of €30 billion ($40.2 billion) in spending cuts, tax increases, pension overhauls and growth-boosting measures.

The Italian austerity package will likely be followed by Franco-German proposals on Monday to create a new regime for budget policies in the euro zone, which European leaders could adopt at a summit on Dec. 8-9.

As always, much more at the link; I can’t quote more than a few short paragraphs without running afoul of “fair use” standards. Though the JOURNAL does have a subscription wall, it also allows some readers a free pass to view entire articles for a limited time. But the best deal is to subscribe to the JOURNAL, digital edition: it’s the best newspaper in the country for news and understanding business and economics, and really the best newspaper in the country, period.¹

Prime Minister Monti and his government, the cabinet consisting entirely of technocrats, with no politicians, are taking the steps that have to be taken; the Keynesian economic theories advocated by some economists who have no actual responsibilities for anything are being ignored by the economists² who now do have the actual responsibilities of government, in large part because they simply have no other options. Dr Monti said, “We’re faced with an alternative between the current situation, with the required sacrifices, or an insolvent state, and a euro destroyed perhaps by Italy’s infamy.” The Keynesian alternative, of more borrowing to support increased government spending to stimulate the economy, wasn’t among his choices; right now, the Italian government is hoping that the austerity plans proposed — and they still await final approval by parliament — will enable the more solvent members of the European Union, the International Monetary Fund, and perhaps even the United States, to provide the means by which Italy can refinance its debts under more manageable terms. To do that, Italy must seriously cut its budget deficits. Italy’s national debt is €1.9 trillion, about 120% of its gross domestic product.

The European Union and the United States are willing to help Italy, if they can, because the prospect of the economic reverberations of an Italian default are potentially serious enough to cause disruptions and losses in global financial markets which could trigger another recession, even as the developed nations are trying to come out from the 2008-2009 recession. Recessions come and recessions go, but there hasn’t been a sufficient enough recovery from the previous recession³ to easily weather another one in 2011-2012.

There are some in the United States who continue to advocate Keynesian economic notions of increased government spending, financed by borrowing, as a way to stimulate our economy, to increase our economic growth rate; President Obama was certainly one of them, with his 2009 The American Recovery and Reinvestment Act stimulus legislation, though that stimulus program failed to deliver on the promised numbers, and recently released figures from the (supposedly) nonpartisan Congressional Budget Office indicate that the ARRA cost more than projected, produced fewer jobs than promised, and crowded out some private investment. One incontestable effect, however, was to increase the national debt by close to a trillion dollars.

Italy has gotten into a serious debt crisis with a national debt around 120% of its GDP; in the United States, our national debt is right at 100% of GDP.4 We haven’t reached Italy’s crisis point, yet, but we will soon enough if government spending goes unchecked, and even sooner if a second stimulus plan, such as President Obama’s (apparently going nowhere) 2011 jobs bill proposal, is passed. We really do have a choice: we can continue to run up deficits and debt, until we find ourselves in Italy’s position, or we can cut spending earlier, and though it will not be particularly pleasant, get our accounts straight before we run up on a crash.
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¹ – This is not a paid advertisement.
² – Dr Monti received his graduate education at Yale and was the European Commissioner, beginning in 1995, with the portfolio for was responsible for Internal Market, Financial Services and Financial Integration, Customs, and Taxation
³ – In the United States, the recession officially ended following the second quarter of 2009.
4Our total federal debt is divided into two sections, debt held by the public and debt held by federal government accounts. The latter consists of government debt owed to other federal accounts, such as the Treasury Bills owned by the Social Security Trust Fund. The former is debt held by someone other than the federal government, from private investors to corporations to foreign governments.

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  1. Merkel, Sarkozy Favor Treaty Change

    Paris—French President Nicolas Sarkozy and German Chancellor Angela Merkel said Monday they favor a wholesale change to European Union treaties to enshrine fiscal discipline and restore investor confidence, even if it applies only to the 17 euro-zone nations

    Presenting a united front after a two-hour meeting in the French capital, the leaders of the euro zone’s two largest economies resolved two of their key differences that were seen as blocking progress toward a sustainable plan for the currency bloc. They agreed on automatic sanctions for countries in breach of euro-zone budget rules. They also made a commitment that the participation of private-sector creditors—a key part of the bailout agreement under discussion for Greece—would be limited to that one country, a concession that marked a shift from earlier plans to enshrine private sector participation in any future bailout agreements. . . .

    Mr. Sarkozy added: “The message to investors from across the world is that in Europe we pay back our debts.”

    Much more at the link. I’ll have more about this later, but upon an initial reading, it sounds like Germany and France want the eurozone countries to surrender sovereignty over their budgets.

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