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Opinion: Eurozone crisis will bring down governments

Leaders of Ireland, Portugal, Spain and Italy will be clinging to power in 2011.

Beyond the Pyrenees: It surprised some that Italy, too, felt the sting of bond market selling pressure following the Nov. 28 EU finance ministers’ meeting, which took no radical new action to stave off the crisis. Along with Belgium, which is facing an existential crisis pitting Flemish-speakers against French-speakers at precisely the moment when the country is nearly bankrupt, Italy is both deeply indebted and in the midst of a full-blown political crisis. Urgent action to curb government spending may now be required to keep Italy from losing market confidence.

Yet the government of Silvio Berlusconi only barely escaped collapse on Dec. 14 and now relies on the barest of margins for its majority. Reforms to date have been only piece-meal and the country may not be prepared to legislate the kind of fiscal readjustments bond holders may demand in early 2011.

All of this raises the chance that Italy will become the first G7 nation to face the prospect of a market-driven crisis which, in the worst case, could mean default. The implications of an Italian default would be tremendous and global — Italy remains the world’s sixth largest economy. Given Italy’s chaotic domestic political scene, it may take something that dramatic to dislodge Berlusconi once and for all.

The cradle of profligacy: Greece, meanwhile, has enjoyed a respite from eurozone scare headlines, but only due to the severity of the storms buffeting its fellow PIIGS. That respite will end in 2011 as the extent to which Greece is missing the targets of its original rescue become apparent. On Dec. 28, Greek reports of a plan for a 2012 “restructuring” — i.e., a managed default — appeared, underscoring RGE’s long-held view that Europe’s least solvent country would be unable to grow and cut its way to health.

Greece is by far the EZ’s most indebted member, with a national debt-to-GDP ratio of 144.2 percent. Yet, for all this, Prime Minister George Papandreou has kept discipline within his socialist PASOK movement in the face of fierce street protests and severe austerity measures. He has been blessed by his enemies: “International speculators,” “Eurocrats” and German bankers make for easy scapegoats. So, too, do his political opponents in the New Democracy movement, who (mis)led the previous government and lied repeatedly about the size of the annual fiscal deficit. Even the anarchists who killed three people, including a pregnant woman, during the May protests, unwittingly aided Papandreou, as he was deftly able to vilify fringe elements opposed to his austerity program.

Ironically, the leader of the country which touched off the sovereign debt crisis appears more secure in office than most of his peers. Unless a credible political opponent emerges soon, it appears unlikely that Papandreou’s government will fall before elections are due in 2012. Greece itself, however, may not be so lucky.