Now that both Greece and Italy have each decided on new leaders, the big question of whether Prime Minister Lucas Papademos and Former European Union Commissioner Mario Monti can lead the two nations out of harm's way looms on the horizon.
If financial markets are an indication, the new leaders had better act swiftly. On Monday, the stock market's pendulum was swinging back in favor of pessimism. The Dow shaved off 0.6%, the S&P 500 was down 1% and the Nasdaq was off by 0.8%. Light volumes likely accounted for some of the poor gains. However, Italian yields soared close to 7%, and the euro, considered a close gauge of sentiment around the debt crisis, weakened by 0.8%. Overall, investors are looking at the latest developments with a skeptical eye.
If the new leaders in Europe want to accomplish anything, their best bet is to do so earlier rather than later. Both Italy and Greece could get trapped again in political deadlocks if public confidence in the leaders wanes.
For now, Italy is happy to kick out former Prime Minister Silvio Berlusconi. The Itlian press has even nicknamed him "Super Mario." Sick and tired of political bickering, market participants are glad to see the country tap Monti, an economist who stands a better chance of rising above fractious politics.
However, a shift in leadership only represents the first steps for Italy and Greece in their long journey toward fending off crippling debt problems. For Italy, the greatest challenge is how to breathe new life into its economy, which many economists project to grow at less than 1% per year for the next decade. For Greece, the greatest challenge is how to pay off its immediate debt obligations to avoid a catastrophic default.
Already Monti is in a rush to put together a new team and could announce a new cabinet after wrapping up consultations on Tuesday. He has to pick the right combination of officials -- he needs political insiders who ca! rry supp ort from parliament, but also politicians who don't draw the ire of opposition parties. After a team is announced, Monti faces votes of confidence from both the parliament and senate to solidify his government.
Thereafter, Monti has some difficult choices to make in order to lower Italy's debt to gross domestic product ratio, which currently sits at 120% and is expected to grow further at the country's current rate of economic growth. To raise government revenue in the short term, Italy could impose additional taxes on the rich or sell some of its holdings in private companies. For the long term, Italy could reform its labor laws to encourage hiring and firing, as well as curb collective wage-bargaining. All of these options could draw opposition from unions, citizens, political leaders and interest groups.
Meanwhile, Greece's Lucas Papademos, who like Monti is an economist and not politician, takes up the challenge of securing the country's next bailout package. So far Greeks have shown overwhelming support for his appointment, according to a number of opinion polls over the weekend. The leader is expected to survive a vote of confidence this Wednesday.
On Monday, Papademos was in front of his parliament outlining policy plans for faster structural reform and declaring that the country has already met requirements necessary for the 8 billion euro loan installment. Next he will present Greece's budget for 2012 in front of European finance ministers in Brussels on Thursday. The austerity measures get debated in parliament as early as Friday with the end goal of convincing the
troika creditors to release the landmark bailout package.
Further cutbacks in spending still threaten to revive social unrest in Greece. Like Papandreou, Papademos will have to walk a fine line between pleasing the international community and Greek protestors. A sign of weakness may give the country's left-wing parties an opportunity to demand immediate elections, as they did during coalition talks.
At stake in ! the debt crisis is Greece's survival in the European Union, Italy's fiscal destiny and the fates of neighboring economies. In short, the clock is still ticking on both Italy's and Greece's leaders to contain their own debt problems so that more nations don't get sucked into the crisis. Neither can afford complacency because investors will only put stock in the fresh faces for so long.
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