Europe’s Economy is On Life Support

Italy’s Prime Minister Silvio Berlusconi has lost the fight for the life of his government , as Italy’s bond yields (the country’s cost of borrowing) surged over the critical 7% mark. He has promised to resign once Italian lawmakers pass the austerity legislation pledged to the European Union and the European Central Bank (ECB).

As legislators wait for the bill to show up, it is expected that the bill will only address some of the key issues and will fall far short of a real Italian bail-out. Nevertheless, this move may demonstrate both a stronger effort by Italy to secure its economy and by its eurozone partners to help Italy ensure that its fiscal reforms will be effective.

Italy’s crisis follows hard on the economic crisis in Greece. Both countries have huge economies that cannot sustain themselves. Both are burdened with enormous debt, and both face economic disaster. Greece has already received two bailouts to cover their debts that now amount to $485 billion, and risks defaulting on its newest commitments. Greek Prime Minister George Papandreous has also announced his resignation, although a successor has not yet been announced.

The crisis is not limited to Greece and Italy, although these two countries have the greatest debt and unsustainable economies. The crisis has spread from Greece to the Irish Republic and Portugal, to Spain, and to Italy. France and Germany are also facing economic crises of their own: Greece owes nearly $57 billion of its debt to France and almost $34 billion to Germany, putting both countries at high risk for further economic failure.

Greece has twice been the target of eurozone bailouts. It received 110 billion euros of bailout loans in May 2010. Then in July 2011, it was earmarked to receive another 109 billion euros. But Popandreus announced that the austerity measures required to accompany the loan would be subject to a Greek referendum, and the loan was immediately put on hold.

Moreover, bond yields on Spanish and Italian debt continued to rise. This led to fears that their large economies would also need to be bailed out. The EFST (European Financial Stability Facility) eurozone rescue fund had 440 billion euros, not nearly enough funds to handle that emerging crisis.

Finally, the failing economies in Europe filter down to the local populations, who are suffering from business failures and growing unemployment. For example, in the UK, the number of business failures in retail and wholesale is predicted to grow by 12.5% to 3,104 in 2011 from 2,759 in 2010. Failures in personal services, such as the hair & beauty and consumer goods repairs, is expected to grow by 2.8% to 1,288 in 2011 from 1,252 in 2010.

Unemployment figures are no more optimistic. In Greece, where the national debt stands at $532.9 billion, the unemployment rate last year was at 12%. In Ireland unemployment was 13.7%, and in Spain the rate was 20%.

Analysis:  A great deal of criticism has been heaped on the governments of Europe because they were so slow in grasping the gravity of the crumbling economic situation and the rising tide of economic disaster. While the European crisis approaches catastrophe, the US economy teeters on the brink. The wild swings of the financial markets do not bode well for America, which will be heavily impacted by the failure of Europe’s economy.

Europe is deeply entrenched in socialist solutions that have led to unchecked spending and huge debt, resulting from the huge cost of massive social programs. As long as the underlying issues are not recognized as the root cause of the current crisis, the downhill spiral of Europe’s economy is likely to continue, and governments will continue to fail at an unprecedented rate. Economic disaster for all of Europe will then be inevitable, because unless spending is drastically cut and the economy is dramatically stimulated, Europe will be unable to recover in the near future. Rather than focusing on yet more top-down bailouts that have proven in both Europe and the US to be failed policy, Europe should be looking for a bottom-up approach that would encourage new business development and job creation in countries where business failures and unemployment are through the roof.

The prognosis for Europe is grim. There seems to be no will to reduce entitlements that characterize the socialist approach to government. But more bailouts will not work any better than the previous failed programs. And the situation in the US will be heavily impacted by failures in Europe.

According to CNN Money, the Federal Reserve and four other powerful central banks – the European Central Bank, the Bank of England, the Bank of Japan, and the Swiss National Bank – provided funds in September to Europe’s struggling banks. Moreover, according to the Federal Reserve, about 50% of U.S. banks have exposure to European banks through loans and credit lines. The level of risk that the American economy has to the explosive debt crisis now boiling in Europe is enough to bring down our own economy, which is already unsteady on its feet. Today the DOW dropped nearly 400 points, punctuating a daily graph that looks like a mountain range. What is happening across the pond could happen here and much sooner than we may expect .

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Ilana Freedman is an intelligence analyst with 0ver 25 years of experience in the field. She is Editor of GerardDirect.

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