Neither Italy nor Spain has been rewarded for the economic pain their austerity has already imposed, as jittery foreign and local bond investors have rushed for the exits.
Now that the European Central Bank has started the covert bail-out of Spain and Italy by buying up swaths of Spanish and Italian debt in secondary bond markets, analysts are beginning to fear that the associated conditionality (Berlusconi and Zapatero made under-the-table deals with ECB President Trichet to push through even more draconian austerity measures) will actually end up making matters worse.
As the New York Times writes in an analysis:
Some economists warn that forcing further cuts could push their teetering economies over the edge. And unlike Greece or Portugal, they are so big that any default might shatter the euro union for good.
"Italy has done everything asked of it -- it has cut left, right and center," said Yanis Varoufakis, an economist in Athens who has written widely on the euro zone's travails. "But if you keep cutting like this you start to cut into muscle, which affects your growth and your tax revenues."
Spain and Italy already have some of the lowest growth rates in the euro zone, with both expected to be below 1 percent this year. And official projections show little improvement coming next year.
Read the full article in the New York Times.
