Framework for a 'new Europe'

Fri, 11 Nov Pre-Open

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The European debt crisis is getting ever more serious, and attention is moving away from Greece to one of the biggest and potentially most explosive economies in the world, Italy. Europe's debt crisis has entered a new, more dangerous phase with the yield on Italian 10-year bonds crossing the 7% level. This is a Euro zone era record that, if sustained, would severely destabilize the debt situation of the world's third largest bond issuer and one of the original six founders of the modern European project. Fears that Europe's sovereign debt crisis was spiraling out of control have intensified as political chaos in Athens and Rome, and looming recession, created panic in world markets.

There are several reasons why Italy's debt crisis is more fearful. Italy is the third largest economy in the Euro zone and has a debt of USD $2.2 tn or 120% of gross domestic product (GDP) which is much higher than Greece. The European Financial Stability Fund (EFSF) has a pot of rescue funds of USD $590 bn. This is only just enough to cover the cost of the loans Italy has to repay next year. Besides, the EFSF only has around USD $330 bn of this money left after taking into account the funds that are going to be lent out to Greece, Ireland and Portugal.

Amid fears that Italy would be too big to rescue, reports have emerged from Europe that France and Germany have started preliminary talks on a break-up of the Euro zone and the formation of a new Europe. Policymakers from both the countries have discussed the possibility of one or more countries leaving the Euro zone. The French President has advocated a two-speed Europe in which Euro zone countries accelerate and deepen integration including tax and fiscal policy, while an expanding group outside the currency bloc stayed more loosely connected.

Greece and Italy were once the cradles of European culture, but now they are threatening to drag the European Union to the grave. While Greece's fiscal woes were worrying, Italy's are monumental. It is high time the European leaders found a solution to the debt crisis because if they did not act quickly and boldly, the world economy runs the risk of what some commentators are already calling the lost decade.