So Spain is expected to ask for a bail-out, and official requests to do so are increasing at the (anonymous) European level.
Sure. And after that, after Spain will have accepted, Italy will be asked to ask too. Indeed, Mr. Monti’s discourse has slowly shifted over the past few months to get the country ready for this: it was “absolutely impossible” first, then “unlikely”, then “with no additional austerity”. Just wait for Spain and the narrative will accelerate in the peninsula too.
What matters to be said here is that it matters little if Italy were or not to join in the bailout plan.
Let’s think about what are the main impacts to be expected from the Italian bail-out. I see four main issues.
b) how much additional austerity should we expect imposed on Italy?
a) Lower spreads will generate 5 billion savings in 2013. Peanuts. Even more peanuts if these are used to reimburse more debt, and only slightly expansionary if used to lower taxes or increase public spending.
b) Additional austerity will have to be pushed forward, even if by so little, to quell German anxieties. It is likely to more than compensate any positive effect due to a).
c) Additional reforms imposed from above may target the wrong needs for the competitiveness of the Italian economy. Or turn out to be irrelevant. Even if they were to be appropriate reforms they are likely not to have an impact for the next 4-5 years. They might have additional negative (recessionary) internal demand effects in the short-run (like re-orienting pay-roll taxation away from firms to workers, as Portugal was recently forced to do by the Troika).
d) If you believe we are right now in an aggregate demand crisis with a liquidity and confidence trap, well it is likely that any lower interest rate will not be able to stimulate that much more borrowing by consumers or by firms wanting to invest.
Much ado about nothing. If we do not launch a parallel fight on the aggregate demand front through expansive fiscal policy we are likely to watch the usual comedy. Which distracts us for a short time and makes us forget pain. But once the show is over, reality will knock at our door with its harsh truth.