The weakest link in the European debt chain is now Italy. Last week, ten-year Italian bond yields topped 6% for the first time since early August. That reflected mounting scepticism over Italy’s ability to tackle its huge debt pile of almost €2trn, or 120% of GDP. So EU leaders urged the government to come up with measures to restore investor confidence.
What the commentators said
Italy has the world’s third-largest bond market and needs to roll over €194bn next year, noted Richard Barley in The Wall Street Journal. So if its borrowing costs rocket as investors lose faith in its debt, leading it to default, “it would be a disaster”. The only way to “reduce debt convincingly and ease market concerns is to boost the country’s anaemic growth profile”. Growth has averaged less than 1% for more than a decade.
The measures required to boost growth “are no secret”, said Guy Dinmore in the FT. They include pension and labour market reforms, slashing red tape and opening up closed professions to competition. But the fractious governing coalition, which has a slim majority in parliament, has lacked the political will to enact any unpopular measures. This summer, the European Central Bank (ECB) “had quietly told [prime minister] Berlusconi to push through reforms” in exchange for the ECB buying Italian debt, said Economist.com. That prevented a debt crisis by keeping Italian borrowing costs under control. But once yields subsided, “Berlusconi began to backtrack”. So European leaders have “bluntly told” him to come up with a credible reform plan.
Whether this will work is far from clear. Reform proposals caused fisticuffs in the Italian parliament this week, and tensions in the coalition are running high. If the coalition collapses, “fresh political uncertainty would only heighten the country’s financial difficulties”, said FxPro.com. “Rome is not burning yet,” said Ruth Sunderland in the Daily Mail. “But it is definitely warming up.”