Analysis: How a toxic mix of public debt, slow growth and paralyzed politics has put the global economy on the edge of another crisis.
MILAN - The ghost of a new recession haunts the United States, and zombies of sovereign debt lurk across Europe. No one seems able to evaluate whether the Spanish and Italian bonds, whose prices continue to drop as yields rise, will have a second life -- or are already a financially dead man walking.
Indeed it has the makings of a horror movie, as ripples of fear turn to waves of panic now rolling across the connected networks of worldwide stock markets. The different worries on either side of the Atlantic feed each other: The United States economy is slowing down, and without the U.S. engine, the world spins ever slower.
In order to beat the sovereign debt crisis and attempt to consolidate public accounts — in Europe as in Washington — it is urgent to cut public spending and raise taxes, otherwise there isn't any hope that other government interventions can give a jolt to the real economy.
It's a globalized film, and among the large euro-zone countries, Italy is the one with the weakest growth; the spring forecasts of the European Commission, which mirror those of the Bank of Italy, give our country a 1% recovery on GDP through 2011, compared with a regional average of 1.6%.
The state of public finances, with a debt-to-GDP ratio of 118%, marks a record in Europe, and requires solutions different from those of the government budget, which was essentially dead on arrival, simply postponing a large portion of the budget adjustments to 2013-2014.
Within this dramatic situation, the latest in a series of sovereign debt crises was triggered. By now, the international markets no longer consider the bonds guaranteed by the US safer than private, individual bonds. On the contrary, if for tiny Greece, which accounts for only 3% of European GDP, the EU's actions were too little too late, what could it do for the major economies of Italy and Spain? Very little, one fears.
In fact, it was far from comforting this week when the president of the European Central Bank, Jean-Claude Trichet, after having urged our country to lay the groundwork in our public finances for recovery, announced that the ECB had begun buying government bonds, but only those from Ireland and Portugal, and not Spain or Italy.
Not just speculation
But is it or is it not speculation that is raging against Italy? Speculative behavior belongs to those who sell a bond, usually without actually holding it, in the hope of triggering a decline that allows them to buy the same bond back at a lower price, thus turning a profit on the difference. In these days there is indeed speculation on security. But there are also many pure and simple sales of those who see trouble coming for Italy, and instead of betting against the deterioration of the situation, they prefer to simply call it quits.
While in Europe the fear is focused on the debt in the public balance sheets, on Wall Street the main worry is the anemic economic growth. Despite somewhat better news Friday with jobs numbers, we have seen a long series of data that depicts an American economy not nearly as strong as it was thought to be only a few months ago, most notably a GDP growth of 1.3%, well below expectations. (The latest grim news came Friday evening when Standard & Poor's downgraded the U.S. from its AAA credit rating for the first time since it was granted in 1917)
The ghost that is hovering above the United States is that of a "double dip" recession after the stock market rally that reached its peak in May was proven to be but an illusion. This is the fear. The hope is that, like any decent big-budget film, the heroes arrive just in time. The charge could be led by the Federal Reserve President Ben Bernanke, who launches the third "Quantitative Easing," to increase available credit by putting more dollars into circulation, and thus stimulating the economy.
But where does the money fleeing Wall Street in New York, Piazza Affari in Milan, as well as London and Frankfurt, wind up? Underneath mattresses (not as virtual as one might think), most likely because in times like these, choosing not to choose could be a logical choice. Gold remains at record levels, and the Swiss franc and German treasury bonds are solid. Some are even turning to the Japanese yen. Anything will do really…just to get out of the screening room of a movie that has gotten far too scary.
Read more in Italian from La Stampa
photo - Lil Larkie