by Patrick Appel
Ryan Avent checks in on Europe:
The growth issue could prove to be the undoing of the timid approach to Europe's crisis. Predictably, the Italian parliament is now working on a rush austerity plan worth €40 billion. But Italian growth was only barely positive in the first quarter of 2011. In May, its unemployment rate ticked up from 8.0% to 8.1%, and in June Italian manufacturing activity fell into contraction. The European Central Bank is now tightening, and Italy may well fall into recession this year. With a debt load of 120% of GDP, and with interest rates rising, the scope for Italy to slash its way to solvency while the economy shrinks is small and diminishing.
The Economist's chart-maker is more optimistic. Roya Wolverson sounds worried:
Big reforms to Italy's labor market, where workers are under-productive and over-paid, are in the short-term bound to slow down already stagnant growth. But without those reforms, investors are bound to flee. Europe's bailout tab will no doubt continue expanding. The question up for grabs is who (banks or taxpayers) will get stuck footing the bill.
Stefan Theil sketches out various endgames. Among them:
One possible way out involves “federalizing” a portion of the debt, with all European countries jointly liable. In essence solid countries like Germany and France guarantee part of the debt of their profligate neighbors. For all debt beyond a set limit, each country would have to go to private investors. This would only work with tough rules, including possible defaults on the private part of the debt, in order to keep banks from recklessly buying up junk debt and starting the cycle all over again, and it does not solve the problem of uncompetitive southern economies racking up huge deficits. For now, Germany strictly opposes any joint “Eurobonds,” with fierce opposition from media and voters who don’t understand why thrifty Germans should be liable for the debt of work-shy southerners.
In other words, it's a fairly safe bet to expect the crisis to get worse before it gets better.
The Dish 