The purpose of the EU Summit back on October 26 — which seems like ages ago — was to help Greece get on a sustainable debt footing, and to encourage immediate reforms in Italy, so that investors wouldn’t lose faith in the country.
Well, leaving aside all the Greek nonsense, it seems that the objectives have already failed in Italy.
This week saw 10-year government yields continue to shoot up into the stratosphere, well above the 6% threshold that’s considered vaguely sustainable.
Italy Government Bonds 10 Year Gross Yield
It’s because of this that the whole world is freaking out over the mere existence of Silvio Berlusconi.
But although it’s painful and scary, the message contained in the chart above will ultimately prove to be a very beneficial one for all of Europe.
See, ultimately, Europe has a very broken monetary system. It’s not just that there were a few profligate countries. It’s that the countries don’t issue their own currencies, and don’t have central banks there to fund the government: Around the world, countries have their own natural funding sources, their central banks, but that wasn’t built in in Europe.
Assuming that Italy is indeed too big to save (via the IMF, the EFSF, etc.) the crisis in Italy will force the ECB to turn on the printers and monetise the debt, a solution so straightforward it’s scandalous that it hasn’t been done yet.
OK, it’s not that straightforward, but it is the solution, and we know it is, because all it would mean is Europe catching up to China, the US, and Japan, in terms of how its monetary system would work.
In the meantime, the unwillingness of Europe to go the ECB route (debt monetization)is what’s causing countries to pursue austerity-driven debt reduction schemes that can’t possibly work due to the collapse in growth. The longer Europe pursues its existing path, the worse of everyone is.
Italy’s crisis moment should help hasten a solution.