11.14.2011 0

New Italian PM does not change fundamental problems

By Robert Romano–The ascendancy of new Italian Prime Minister Mario Monti, along with the European Union’s latest efforts to overthrow the Greek government will not necessarily fix the fundamental underlying problems of the European debt crisis.

For example, increasing the retirement age of women from now 60 years old to begin rising in 2014 to only reach 65, and then only in 2026, or overall raising the retirement age for men to 67 in 2026 and 70 in 2050, will hardly move the needle in the right direction.  As NPR notes, “significantly, the legislation contains none of the painful labor market reforms, such as making it easier to fire workers, that have been strongly opposed by unions.”

The increase in the Value Added Tax to 21 percent had already been approved in the September budget, and other tax measures were already in place, too.

The sale of some state assets is new, but does not even make a dent in the nation’s €1.9 trillion debt and 120 percent debt-to-GDP ratio. The only way to do that will be through debt repayment and robust economic growth, but nobody expects either outcome.

The lackluster reforms on their own explain why Italian 10-year yields are up .25 to 6.7 percent today, and two-year’s are up .299 to 5.99 percent.

The only thing that has helped push down yields on these bonds lately has been European Central Bank (ECB) purchases of bonds on the secondary market.  But those are little more than stop-gap measures.

The Eurozone’s basic problem is that member states would have never agreed to join the single currency without Article 123 of the Lisbon Treaty, which expressly forbids the ECB from making direct purchases of government debt.   Likely, the Weimar Republic experience of simply printing money to pay debts was in mind when the treaty was adopted, a fraudulent practice that detaches value from what is supposed to be a store of value: money itself.

All of which is why economist Adam Smith warned nations against deficit-spending in The Wealth of Nations: “The practice of funding has gradually enfeebled every state which has adopted it.”

It doesn’t matter what puppets are set up as figure heads over states like Italy or Greece.  The fact is, minus a dramatic revision of the Lisbon Treaty, the Europeans simply lack the capacity to provide unlimited financing to heavily indebted sovereigns to refinance a debt that cannot be repaid honestly.

If members of the Eurozone cannot agree to pay down their debts honestly, and do not wish to monetize the debt because of its inflationary and other harmful consequences, the only solution is for states to leave the euro currency and reassert sovereignty.  What is taking place now is a diminution of liberty across the pond, and the rise of a European superstate that is neither representative nor elected.

Robert Romano is the Senior Editor of Americans for Limited Government.

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