04 March 2013

Reuters: EU needs "who lost Italy" debate on austerity

European policymakers should be asking themselves "who lost Italy", after a grassroots revolt against austerity, unemployment and the political elite caused an electoral earthquake in the eurozone's number three economy.

Instead, most are insisting that their policy mix to fight the currency area's debt crisis is right, even though the latest EU forecasts have pushed any prospect of meaningful economic recovery in southern Europe back into the middle distance. A surge in support for anti-euro populist Beppe Grillo and the surprise resurrection of former Prime Minister Silvio Berlusconi on an anti-austerity platform in last week's election have plunged Rome into political deadlock. Italy, which had been governed by respected technocrat Mario Monti for 15 months since Berlusconi's last government fell, is far from the worst affected by the three-year-old debt crisis.

While the European Central Bank removed the danger of a financial meltdown of the eurozone with its bond-buying plan, there is now a growing risk of a social crisis that could lead to one or more southern countries leaving the currency area.

Zsolt Darvas of the Bruegel think-tank in Brussels said southern European countries were trapped in a downward spiral of economic contraction and rising debt for an unknown duration but had no alternative to fiscal consolidation. Using the EIB to inject the equivalent of 2-3 per cent of gross domestic product a year into south European economies for a limited number of years would be the most effective and politically feasible way to revive growth, Darvas said.

Monti warned repeatedly last year that anti-European populists would gain ground in the south unless the eurozone did more to support his efforts and those of Spanish Prime Minister Mariano Rajoy by bringing down borrowing costs. Those costs did fall significantly after the ECB announced its bond-buying initiative in September, but Monti's appeal for more financial solidarity from Germany fell on deaf ears.

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