Forget Spain and its troubles: all roads lead to Rome. On Friday, eurozone leaders will be following three of those roads from Germany, France and Spain to join Italian prime minister Mario Monti at a mini summit.
Eurozone leaders must be getting quite tired of seeing each other (surely far more often than they see their partners) as meeting follows meeting. This time Mr Monti has asked Angela Merkel, Francois Hollande and Mariano Rajoy to brainstorm ideas for kick-starting their economies. Again.
So why is Mr Monti so concerned? Apart from a semi-altruistic interest in seeing the rest of the eurozone do well, Italy’s own troubles are mounting. The country is in recession, forecast by HSBC to shrink 2 per cent this year and 0.3 per cent next year.
Unemployment is running at over 10 per cent and bankrupticies are rising. It’s not a healthy backdrop to the country’s other main problem – huge debt of almost two trillion euros (that’s €2,000,000,000,000.00). It’s this burden which has caught investors’ eyes and the interest the government is having to pay on this public debt is rising.
Ben May, European Economist at Capital Economics, reckons Italian government forecasts for its income and expenditure are too optimistic and that it will have less money available to pay down the debt. Combined with those higher borrowing costs it means that instead of steadily paying the two trillion euros off, the debt will balloon as a proportion of GDP (the country’s output).
Here’s his forecast:
What can the quartet of the most powerful leaders in Europe come up with that would help?
Mr Monti wants the big bailout funds (EFSF and ESM) to pile in and buy up Italian (and Spanish) bonds. This would normally drive down the interest (called the yield) the governments have to pay.
But it’s thought that the bailout funds would be the first to be repaid if there were an Italian collapse, pushing private sector lenders down the pecking order.
Something similar happened to private investors to Greece. It has the logical – if unintended - consequence of putting them off lending further sums as the risk of not being repaid rises – and that pushes the yields higher still. As the private sector leaves the market it concentrates government bonds in official-sector hands.
Mr May reckons a more formal bailout will be needed followed by a fiscal union where countries pool their budgets – and Germany pays. It's an idea which is not wildly popular with Mrs Merkel, of course.
In the meantime, media reports suggest the quartet will focus on Friday on an economic growth package and a banking union plan – a far cry from full fiscal union and far from a convincing answer to Italy’s problems.
The roads may lead to Rome but they could turn out to be a dead end.