December 29, 2011
Once upon a time, conversations about Italy centred on football or holidays in Tuscany. That changed in 2011. Suddenly, all anyone could talk about was Italy’s 10-year bond yields (around 7 per cent, since you ask). This reflects a rather complacent bit of received wisdom – that such high borrowing costs are not sustainable, that Italy will soon not be able to afford them and will have to default on its €1.9tn of sovereign debt, and that this is the event that will destroy the eurozone.
It is true that if Italy fails, the eurozone fails. The biggest threat Rome faces, in fact, is not that its debt becomes unaffordable but that investors stop buying it at any price. Yet the corollary – that if Italy is saved the eurozone is saved – is not true. The bloc’s structural flaws will remain. In particular, the virus that the eurozone has incubated from birth – Greece – will still be in its bloodstream. The eurozone will not be saved until it finally sorts out the Greek mess. The only way to do that is for Greece to leave.
The eurozone’s financial crisis has endured because policymakers have refused to acknowledge this. That stance began to shift in 2011 during the events that led to the collapse of George Papandreou’s government. Yet it remains the most important unaddressed question now facing eurozone policymakers, who should consider a Greek exit as a policy option rather than a taboo. Every attempt to bail out Greece is failing, and each exercise just increases the debt burden while shrinking the economy and its ability to repay.