European Monetary Union Update: New Governments for Greece and Italy

 
     Major developments are occurring with greater rapidity in the financial crisis in the European Monetary Union as fears mount about the stability of the eurozone. 

     Greek Prime Minister Georgios Papandreou resigned after winning a confidence vote to allow the formation of a new coalition government.  The new government of national unity will include the three main political parties in Greece: Papendreou's Socialists, the conservatives and the nationalists.  It will be led by Lucas Papademos, a former high-ranking official of the European Central Bank who is known for his support for fiscally responsible policies, which is an unusual position in Greek politics.  Papademos will be tasked with implementing Greece's austerity program in order to continue to receive bailout funds from the European Central Bank.  It is uncertain whether there will be snap parliamentary elections in February, as originally planned.

     Meanwhile, even as the Greek drama has played out, more and more focus of attention has been placed on Italy because of its size as the third largest economy in the European Monetary Union and eighth largest in the world, which makes Italy too big to fail for the Monetary Union.  I have noted in earlier updates how every time the Italians pass an austerity measure it is praised for making sufficient reforms by Monetary Union officials – who soon afterward panic and urge more reforms as urgently necessary. 

     After Prime Minister Silvio Berlusconi proposed a major economic growth package that include serious reforms in order to ensure Italy balances its budget on schedule by 2013, Monetary Union officials again praised the Italian government.  However, soon afterwards investors began to doubt Italy's ability to implement the reforms because of the increasing instability of Berlusconi's fractious centre-right coalition government as its parliamentary majority has been shrinking.  Fears – and perhaps speculation – drove Italy's borrowing costs to 7%, the same figure that triggered bailouts for Greece, Ireland and Portugal.  However, as the Monetary Union and United States President Barak Obama have noted, Italy is not Greece because its large economy is inherently sound, despite its current low gross domestic product.  In a strong statement on the matter that sought to reassure markets while urging the Europeans to solve the crisis, Obama observed that Italy has a liquidity problem, not a solvency problem, like Greece has.  The European Central Bank, led by new President Mario Draghi, has been purchasing billions of dollars worth of Italian bonds in a so-far unsuccessful attempt to lower Italy's borrowing costs.  Draghi, however, has been careful not to be seen as overly soft on his home country by loaning it too liberally.

     Berlusconi has offered to resign as soon as the pro-growth reforms are passed in order to make way for a new technocratic government.  The reform package cleared the Senate today and will be voted on tomorrow by the lower house of the Italian parliament.  The new centre-right government is expected to be led by Mario Monti, an economist and former European Commissioner.  Monti is politically independent and widely respected.  It is hoped that his government would give Italy the political stability it needs to continue its austerity program while encouraging economic growth.  It is unclear whether there will be snap parliamentary elections in Italy.

     The problems in Greece and Italy are adding to the pressure on France and Belgium, the latter of which remains politically unstable.  Although Italy is considered the firewall of the Monetary Union, having eclipsed Spain in that role, a collapse of France would doom the euro for good.  The French and Germans are plotting a new European financial architecture that excludes the peripheral states whose economic weaknesses are currently threatening the euro project.  Europhiles across the continent continue to urge greater European integration as the solution while the chorus of eurosceptics has grown in size and volume.  As the euro's costs increasingly are seen as outweighing its benefits, the latter group has increasingly urged Europeans to consider what had been unthinkable: the abandonment of the single currency.