By SIMON NIXON [Wall Street Journal] – Germany and its Northern European allies believe only intense market pressure can force weak economies to cut spending and improve competitiveness. But Greece has learned that whenever the crisis in Europe’s periphery threatens to overwhelm the core, Europe will ignore previous broken promises and step up with a fresh bailout.
Italy now appears to be making the same calculation. The government insists it will fulfill its commitment to balance the budget by 2013, but ministers show no appreciation of the urgent need for structural reforms to address the chronic weakness of an economy that grew on average 0.3% between 2001 and 2010 and experienced a 25% increase in unit labor costs relative to Germany over the same period. Instead, they talk incessantly of euro-zone bonds as a solution to misfortunes they blame largely on external forces.
But Italy’s dream of euro-zone bonds is likely to remain a fantasy until trust between member states is restored. This no longer depends simply on implementing austerity budgets. Structural reforms have now taken center stage because they are a test of whether the euro zone is worth saving at all: If countries refuse to improve competitiveness, then any attempted solutions to the immediate sovereign-debt crisis will prove short-lived.
Continued at The Wall Street Journal | More Chronicle & Notices.
