Euro crisis on two fronts

The EU is suddenly facing two financial crises simultaneously, in Greece and Italy, one impacting on the other. 

Financial commentators thought the crisis in Greece was over following the end of the EU’s third “rescue” programme in August, a rescue programme that has introduced draconian cuts, a devastating recession and destroyed much of the economy. 

Now the Greek government is drawing up emergency plans to “stabilise” the banking system. The banks are weighed down by “non-performing loans” – bad debts to you and me – that amounted to €88.6 billion in June.

Clash with Italy

It was the crisis in Italy that has triggered the fresh problems in Greece. Yesterday (21 November) the EU Commission in Brussels formally launched its “excessive deficit procedure” against Italy for violation of the debt ceiling rules of its fiscal compact – in plain English, for running too large a deficit as it fights to kick-start its economy.

The Commission’s move is expected to exacerbate the clash with the Lega-Five Star Italian government, especially if Italy is fined. Italy, significantly, is a net contributor to the EU’s budget. 

Manipulation

To try to break the resistance to its rules in Italy, the EU is relying on manipulation of the bond markets. Risk spreads on Italian 10-year bonds have spiked to a four-year high of 335 basis points, entering the danger zone for Italian banks that hold €380 billion of the country’s sovereign debt.

Unfortunately for the EU these tactics against Italy have led to closer inspection of the situation in Greece and the EU troika’s past treatment that has led to Greece’s intolerable debts. In reality Greece has no chance of solving the crisis if it stays in the euro.

And some are calling for us to stay in the EU! Are they insane?