There aren’t many signs of national bankruptcy in Siena, capital of Siena province in Tuscany. There is the odd boarded-up shop and the occasional “everything under 99c” store but the cafes are full and la dolce vita goes on. So it came as a shock to find that Italy is being lined up as the next victim in the slow-motion car crash of Europe’s rolling sovereign debt crisis.
Panic set in among international investors when the yield on 10-year Italian bonds rocketed last Monday: at one stage it broke through 6%, adding €35 billion a year to the costs of servicing Italy’s €1.8 trillion debt mountain. This caused investors to fear the worst.
International investors are not being wholly irrational. The chances that Italy will default have risen because of a number of factors, including the strong(ish) euro, which makes its exports less competitive. Furthermore, its economy has barely grown over the past decade and growth forecasts are anaemic; the government of Silvio Berlusconi is seen as losing its grip, even though at the eleventh hour it did manage to push through a €40bn cost-cutting package.
The trigger came on Monday, when it seemed that Italy’s “bunga bunga” loving prime minister was about to fire his finance minister Giulio Tremonti, perceived as a guardian of fiscal prudence.
But underpinning all this has been incompetence and indecisiveness in Brussels. The EU’s bailout mechanism — built at a time when it was assumed the debt crisis would be confined to smaller nations — is hopelessly inadequate.
Italy: a victim of Brussels incompetence?
Worse, the eurocrats have failed to agree on “burden sharing” — whether private-sector banks, insurers and other investors should take “haircuts” on loans (i.e. get back less than they loaned) made to troubled sovereign borrowers such as Greece and Portugal.
European politicians increasingly accept that it is time for banks to take the pain, but the European Central Bank prefers to mollycoddle them, so that the agony is transferred to the people of Europe through austerity measures.
Europe’s politicians must come up with clearer solutions — and the ideologues in Frankfurt must decide whether they wish to preside over a currency zone that exists or one that doesn’t.
In Tuscany, however, no-one seems to care. As a vineyard-owner told me yesterday “all that matters is family, good wine, good food, and sex”.
I wish…
An edited version of this article was published in the Sunday Herald on 17 July 2011