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Peter Spiegel of the FT has a must-read piece on the urgency of the current EU Summit, which includes this key insight…Although Italy does not have Spain’s banks, Greece’s economy, or Ireland’s deficits, it is easy to forget how close to the edge Rome reached last summer under the erratic leadership of Silvio Berlusconi. It may not be an exaggeration to say that Mr Monti has about a month to ensure it does not happen again.
It’s a really key point made here: What exactly is the problem with Italy?
There’s no banking crisis and there’s no massive government deficit. There are loads of past debts, but at normal borrowing rates, this would be easily sustainable.
So what then do Italy’s high borrowing costs signify? A good explanation we heard from one plugged in Eurozone observer is simply: The high yields basically represent doubt about the total existence of the Eurozone since under the existing framework, Italy really is too big too save.
More concretely, you can sense why there’s such urgency for this week.
As Spain’s PM said this morning, yields for these countries have to fall now before a huge hole is torn in their fiscal position. Sure, there are flaws in both countries with leadership labour and all kinds of stuff. But that’s not a good reason for the economy to be destroyed, especially when both countries are making more-than-reasonable efforts to address their problems.