In the past 12 months, four European premiers have lost their jobs because they failed to fix their countries’ mounting debt problems. A fifth could join the list on Nov. 20, when Spain holds a general election.
The take-away: When leaders fail to address urgent fiscal matters, the capital markets will punish ― and ultimately remove ― them by making the cost of financing debt prohibitively high.
Heads started rolling this year when Ireland’s and Portugal’s prime ministers lost elections soon after being forced to accept EU bailouts. Italy’s Silvio Berlusconi and Greece’s George Papandreou are the latest victims; both have been replaced by economic technocrats with no particular party loyalty.
Over the past weekend, Mario Monti was named Italy’s new prime minister. Monti, formerly a political economy professor and university president, spent more than a decade in Brussels, where he last served as the European Commission member overseeing competition policy. He took on corporate titans like General Electric Co. Chairman Jack Welch, who in 2001 sought to merge GE with Honeywell International Inc. Even though U.S. authorities had approved the $47 billion deal, Monti said no.
The ability to say no will come in handy. Italy must reduce its long-term spending and reform its stalled economy enough to reinvigorate growth. It must do all this in time to roll over, by April, about 200 billion euros ($272 billion) in maturing bonds ― at reasonable rates. The interest rate demanded by investors last week punched through the 7 percent mark, the level reached by Greece, Ireland and Portugal when they sought bailouts.
European markets were not totally appeased on Monday: Stocks declined overall, and 3 billion euros ($4.1 billion) of five-year Italian notes sold at a 6.29 percent yield, the highest since June 1997, pushing Italy’s total debt up even more. If Italy is forced to continue to pay such astronomical rates, it won’t be able to refinance all its debt, and default will follow.
To avoid that, Monti is likely to pursue policies that will make Italy more growth-oriented and less crisis-prone. As an economist, he understands that what Italy does to help its economy is also crucial to preventing a global recession. His reforms must include eliminating red tape and loosening the stranglehold that professional unions have over the job market. He also must revamp Italy’s tax code to make evasion much harder and further reform an overburdened public pension system.
Greece’s new prime minister, Lucas Papademos, also an economist and a former central banker, has many of the same challenges as Monti. He has one additional burden: He must see to it that Greece makes good on its debt-reduction commitments by mid-December, or else the EU will withhold the next tranche of bailout funds. Without it, Greece also risks a disorderly default.
One hopes these shifts have not been lost on President Barack Obama and the U.S. Congress. The U.S. certainly doesn’t face anything like the dire situations confronting Greece and Italy. Still, it would be foolhardy to assume the U.S. can’t be similarly manhandled by the capital markets, even with 10-year Treasury yields at a low 2.04 percent.
Failure by the congressional supercommittee, say, to come up with $1.2 trillion in spending cuts and revenue increases over 10 years, thereby triggering larger automatic cuts, could easily open a new chapter of vulnerability. The deep cuts triggered by the failure would certainly mark the apogee of political dysfunction.
Americans are fond of deriding European technocrats. Yet it’s the technocrats ― a cadre of economists with international experience ― who have accepted the challenge of stabilizing the continent, putting aside personal or political interest. They are Europe’s best hope.
If Congress and the president can’t find a way to work together, one shouldn’t be surprised if Americans start looking for technocrats, too.
