The European Union and the financial markets have been given not a single moment of respite this week either. The centre of crisis and all fears has now moved from Greece to Italy. The yields on Italian government bonds on Wednesday came close to bursting through the critical 7,5 per cent mark, the highest since the introduction of the euro ten years ago, calling for a new European Central Bank intervention.
On Wednesday, Italy’s situation was seemingly even worse than Greece’s, where outgoing PM Papandreou had officially announced his resignation to make room for a new national union cabinet. The government in Rome lost its support in Parliament and the prospects remain gloomy as austerity measures could dragged on until a possible snap election. Except if the parliament nevertheless adopts the fiscal package before PM Berlusconi’s resignation, as requested by President Napolitano. No one is eager to imagine what would happen if bond yields stay above 7 per cent, especially knowing that Italy has approximately EUR 64 bln worth f bonds to redeem in the first half of 2012. The Italian debt of EUR 1,900 bln, making up a quarter of the total euro-zone debt, could set in motion a chain of reactions accelerating the decline of the euro-zone.
With European, Asian and American stock markets suffering a dramatic plunge with the surging of Italian bonds’ interest in the background, IMF’s Christine Lagarde warns that, without a concerted global effort in place to come out of crisis, the world is headed for ‘a lost decade.’ In other words, devastating recession. But what can be done? From Berlin, Chancellor Angela Merkel gave a political answer: amend the Treaty of the European Union. ‘More Europe, not less Europe’, she said. This would be a new step towards a federalisation of the euro-zone through harmonised tax and economic policies, but also a new step in the direction of the foundation of the controversial project called the United States of Europe.
The project was hastily embraced by President Traian Basescu on behalf of Romania, without taking the trouble to explain to the public what a mammoth federal state will mean apart from the obvious surrender of national sovereignty. In fact, the current European crisis has brought back into the limelight the prophets of a federative Europe such as the first EBRD President Jacques Attali. In a recent interview with France 24, Francois Miterrand’s former adviser was saying hat, at this point, the European Union has three options: bankruptcy, inflation and federalisation.
Bankruptcy because the member states won’t be capable to end the sovereign debt crisis on their own and inflation if ECB starts printing off money to cover the debt. In his opinion, a full federalisation would very easily solve the sovereign debt crisis for the simple reason that, as a stand-alone legal entity, the EU could issue a minimum of EUR 5,000 bln worth of bonds every year, a fabulous amount no other country in the world could possibly match. His answer would therefore be to extinguish member states’ debt by creating a new debt at a central level…
Meanwhile in Bucharest the central bank governor says the current euro crisis seems very much illogical. At a time when all lunatics have an opinion on how and how much we should borrow in order to pay exiting debt, Mugur Isarescu comes and says the answer to the sovereign debt crisis in Europe has to be economic rather than political. At last a voice of reason in a world that is loosing it completely. ‘It is an economic crime to pump up an economy and then to squeeze it in order to pay a debt. We must present to the society the solution of credit management. This is the solution for Romania,’ says the governor.
The capitalist model of development subsequent to WWII was founded on debt. To create a healthy system of development, based on economic growth principles, will be difficult to implement because of the huge influence of the banking system living off others’ debt and also because of political reasons. The Romanian Government now prepares a budget with a deficit intended at 1.9 per cent which means not just a continuation of all these austerity measures, but also very little money left for job-generating investment. On the other hand, the government will need to borrow EUR 13.2 bln until the end of the year for foreign debt repayments.
With an economic growth between 1.8 and 2.3 per cent projected by the IMF, Romania won’t be able to pay the principal and interest and will just have to take new loans next year, in very big amounts which will push the foreign debt up to almost EUR 120 bln. Meanwhile, the government is not taking any active measure to create jobs, relax taxation and secure a healthy growth. Unfortunately, in order to apply the wise solution for coming out of crisis, Isarescu should move from Lipscani (headquarters of the central bank) to Victoria Palace (Cabinet hq) or perhaps even the Cotroceni's presidential palace, if we are to accept the way in which the Constitution is interpreted today.
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