Focus in sovereign debt crisis shifts to Spain and Italy
Greece is just a "sideshow", the real issue is whether Italy and Spain can remain in the eurozone.Comment out today from Douglas McWilliams, chief executive of the UK's Centre for Economics and Business Research (CEBR, suggests that Greece is merely a 'sideshow' in the sovereign debt crisis that continues to unfold in Europe, and that the real showstoppers could be Italy and Spain.
McWilliams says Spain and Italy are different to other eurozone economies like Portugal and Ireland, which are relatively small and could be allowed to fail without causing much of a "body blow" to the rest of the eurozone. Spain and Italy. on the other hand. are much larger economies and are central to the EU.
That means bailing out both would be costly and any default by them would cause substantial damage to the EU, says McWilliams. "Italy has a relatively small budget deficit 4.5% of GDP in 2010, but a large debt problem of 129% of GDP. There is not a major problem of property debt. But the government under embattled Prime Minister Berlusconi is weak and yet lacks rivals with a credible economic policy. Meanwhile, Italy’s economy has ground to a halt with exports fundamentally uncompetitive with a strong Euro.
While one of the successes of the EU, McWilliams says Spain's premature joining of the eurozone led to low interest rates and a massive construction boom, leaving 1.5 million unsold properties according to experts RR Acuna and associates. "The debt problem is not especially severe at 73% of GDP though the deficit problem at 9.2% of GDP in 2010 is such that the debt ratio is rising."
Although Italy and Spain could potentially sort themselves out, CEBR calculations suggest that the price of paying off the debts including potential property liabilities and pricing themselves into an economically competitive position would mean a further squeeze in living standards of 13% for Spain and 19% for Italy. "The problem is now probably most severe for Italy because it is difficult to see how it can get out of the mess without a credible government and with the yield on long term debt now up to 5.45%, the debt itself is close to becoming unsustainable," says McWilliams.
He doubts that the Italian or Spanish public will weather the austerity measures required to remain within the eurozone, and gives the euro a one in five chance of surviving the next 10 years in its current form.
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Date Posted:11th July 2011