There is lots of news today about how the newly non-elected leader of Italy is proposing spending cuts. That’s what the headlines say. The New York Times reports:
In the process, European leaders will begin to change the fundamental structure of the union, creating a form of centralized oversight of national budgets, with sanctions for the profligate, to reassure investors that this kind of sovereign-debt crisis is finally being managed and should not happen again.
The immediate focus of worry is on Italy and Spain, which have been buffeted by market speculation even as they move to fix their economies. That process took an important step on Sunday, as Italy’s cabinet agreed to a package of austerity measures to put the country in line for aid that would improve its financial stability.
Buried deep in the article is this fact: the total cuts proposed by Monti’s government are $32 billion. This is for a nation with a $2.6 trillion debt.
At the same time, Mario Monti, Italy’s technocratic prime minister, has announced a $32 billion package aimed at showing the markets that Italy is serious about managing its debt, and will balance its budget by 2013. Among other things, he called for reintroducing an unpopular property tax, raising the retirement age, hiking the value-added tax and cutting payments to regional governments, which could then be forced to lay off workers.
A $32 billion cut is supposed to be “serious.” I ask: why does Mr. Monti expect to get Italy’s government unions to accept this “serious” cut? Why does he think the voters will accept these cuts? They never have before.
Here is what really is serious. Italy must roll over $400 billion next year. There is no way that private investors are going to lend Italy’s government that much money at rates under 10%. Maybe not under 20%. Yet Italy is in trouble at 7%. So, the governments of the north must now step in and co-sign notes for Italy. If Italy defaults, which it surely will, the governments of the north will have to borrow in order to pay off these notes.
It’s all smoke and mirrors. The talk about a weekend solution to the Eurozone’s crisis is for sleepwalkers. We are told that it’s all going to come together over the weekend. It’s all going to be “jes’ fine.” Trust them.
No one in his right mind should trust them. But investors have hope. They don’t want to believe the numbers. They want to believe that kick the can — more debt — is a solution.
They have come up with nothing since the crisis became visible in April 2010. The bailouts have done nothing to cut interest rates on Greek debt: 110% on 2-year bonds. Yet the governments of the north are still lending money to Greece.
The voters in Italy know this. Why should the trade unions consent to any “austerity measures,” small as these measures are? Why not strike? Or riot?
Monti is a Goldman Sachs adviser. The voters of Italy did not elect him. What political legitimacy does he have? Not much. When the reforms kick in, not any. Yet he is supposedly Italy’s hope.
Government is based on massive debt and massive lying. Investors and voters accept both. That’s why the Great Default is inevitable.