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November 09, 2011

Europe Struggles to Restore Confidence in Troubled Economies

by Al Pessin

Greece named a new prime minister Thursday, and Italy is planning to do the same fairly soon, as European leaders move to regain the confidence of financial markets and to ensure that the region’s economic crisis does not get any worse.

Greece chose economist Lucas Papademos to head its interim government, with the goal of getting the tough conditions of the European financial rescue package approved.  

Italy’s embattled Prime Minister Silvio Berlusconi is also expected to give way to an interim government, perhaps also to be led by an economist.

The goal is to restore confidence in the two troubled economies and their leadership, and to stabilize financial markets, in the hope of avoiding the kind of dire consequences highlighted by headline writers in recent days.

But Economist Ben May at London’s Capital Economics analysis firm says it is not all about image and confidence.  He says Italy’s debt is so high that even as the world’s eighth-largest economy it will not be able to pay all of it back, with huge regional and global repercussions.

“Clearly what has happened now is fears about Italy are growing and certainly we think there is a real chance it might have to default to get its debts down to a sustainable level," said May.

Italian-born political economist Leila Simona Talani of London’s King’s College says such concerns are unwarranted.

“I do not think it is unsustainable," said Talani. "I know that non-Italians have the feeling that it is not possible to handle such a huge debt.  It is a huge debt.  Italians know, however, that this debt is financed by Italians, and is very likely to keep on being financed, even in a higher percentage than before, by Italians.”

But the European Union is imposing tough conditions on continued financing of the troubled economies, and insisting on tighter monitoring.

Already, austerity plans are causing social unrest, particularly in Greece.

Even in Britain there have been demonstrations, including one this week by students protesting higher tuition fees caused by government spending cuts designed to avoid an Italian or Greek scenario.

Some experts are concerned about an austerity-based approach that could lead to many years of recession in some countries, and have begun to call for targeted spending to stimulate growth.

“You lost competitiveness," said Talani. "You lost productivity.  So you have to invest in these.”

And that is a tough thing for European leaders to contemplate as they focus on reducing debt and convincing banks and investors that, with help, troubled countries can live within their means.