After Greece, Portugal it is the turn of Italy now

Italy and Spain insist that they are secure, but their economies are increasingly seen by markets as the next in a line of dominos: yields on both of their 10-year bonds are now hovering around 6%, meaning the interest rates on their debts are twice as high as those on Germany's. They are nearing the unaffordable levels that could trigger talk of default. Despite this, Spain's Finance Minister Elena Salgado insisted on Monday that Italy and Spain have "strong economies" and that there is no logic to them being affected by market instability.

The case of Italy is particularly worrisome for the euro zone: the country is a founding member of the European Union, a member of the G-8 and, by most accounts, the world's eighth biggest economy. Italian officials point to their large, diversified economy and their high savings rate as reasons to dismiss the market jitters. But not only does the country have a debt-to-GDP ratio of 120%, economic growth is anemic: In the first quarter of this year it was just 0.1%, well below the euro zone average of 0.8%. That helps explain why the odds are shortening on Italy being the next European economy to receive a bailout — literally: Irish bookmaker Paddy Power says Italy is now odds-on to be bailed out by the end of this year, along with Spain.

Leo Cendrowicz in Time Here

What the Greek tragedy can teach us?

A year-and-a-half after Lehman Brothers up-ended the world economy, a similar tragedy is unfolding in Europe. If the Americans were widely blamed for poorly regulating buccaneer capitalism and excessive risk-taking, this time it is the European Union (EU) that should take the rap for letting rogue borrowers like Greece to join the eurozone. Despite a 110 billioneuro ($140 billion) bailout package, Greece looks set to threaten the political and economic basis of the European Union. The size of the bailout — for a country with 1 per cent of India’s population and one-quarter its economic size — is larger than India’s current GDP by a wide margin.

How can a country as tiny as Greece rock the EU, which is bigger than the US economy? The answer: in an integrated world, market confidence is key. Greece had to be rescued from a debt default to prevent a domino effect. If it had gone under, the markets would have started dumping the bonds of other problem countries like Spain, Portugal, Ireland and Italy. Once panic sets in, the EU cannot survive.

This brings us to the first lesson for India, which is actually an economic union of many linguistic states, just like the eurozone: don’t let central or state debt grow to unsustainable levels. For the last few years, the UPA government has been squandering the fiscal prudence achieved in the NDA years through profligate spending. The public debt-to-GDP ratio is a high 82 per cent for centre and states — and rising.

From "What the Greek tragedy can teach us?" by R Jagannathan in DNA

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Is Euro a failure?

 Cartoon courtesy : The Hindu, Surendra

As world markets continue to raise concerns about Eurozone countries, this column argues that the euro has been a failure. Why should money be poured into Greece to "save the euro"? Besides the moral hazard effects of the intervention, it makes little sense to prolong a monetary regime which is actually one of the reasons why these Eurozone countries are in trouble.

During the run-up to the monetary union, many economists were sceptical and warned that it would not work. Their argument was simple. Europe was not an optimal monetary union because it lacked both labour mobility and the fiscal mutual insurance schemes that exist in the US. Also, nominal price formation was rigid so that we could not expect it to offset imbalances and competitiveness differences quickly. Despite those shortcomings, the sceptics considered that the costs of monetary union were not too large after all, because asymmetric shocks are not that important quantitatively.

The Eurozone was formed and it was largely accepted as an irreversible fact. The sceptics refrained from questioning its soundness as an institution for fear of being perceived as unrealistic or extreme. Mentioning that a member country might leave the monetary union some day was considered a political non-starter, so that pragmatic economists who insisted on making a difference in the policy arena did not see the point in ruining their credibility by making such suggestions.

With the Greek crisis, we are brutally reminded that such a prospect is far more real than it was assumed. In order to keep Greece in the Eurozone, other countries must foot the bill, while imposing harsh conditions that – in my view – will be fulfilled only hypothetically. So why do we want to keep Greece in the Eurozone, especially given that membership plays no small role in its current troubles?

From a mind boggling article by Gilles Saint Paul in Voxeu

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