Professor Fariborz Moshirian
Borrowing costs in Italy have surged above 7 per cent, which has triggered a large sell off of French banks that hold much of Italy’s debt, and this has caused volatility in share prices around the globe.
The present turmoil will continue for some time to come, and the spotlight is now fully on France, where bond yields have jumped because its financial institutions have a large exposure to Italian debt, and have the most to lose from Europe’s debt crisis.
I think the country has no choice but to sort it out themselves.
They can’t run to the G20 for a hand out. Italian debt is around two and a half trillion euro – way too big for the European Financial Stability Facility to fund a bail out. The IMF certainly doesn’t have capacity to do that so the Italians have to do most of work to reduce their debt, make the economy more efficient, and reform the Italian labour markets. Italy is going through a major challenge at the present time. However this reform will be worthwhile in the long run and the current crisis could actually accelerate the process.
There are also major challenges facing Greece. I think now the Greek people have a clear choice. They can stay in the eurozone, or cut and run. However 70% of people in Greece say they would like to be part of the eurozone, and that means they have to now fast-track their reforms rather than agonise about them. If they did leave the eurozone, things would be very difficult. Their new national currency – call it the new Drachma – would be devalued by 50%, and that would increase the debt of all companies by 50% because everything at the moment is measured in euro on the balance sheet of companies, and so they could create more problems for themselves if they leave the eurozone. The citizens of Greece want to stay in – and it would cause huge problems if they leave. Therefore, I think they should stay in the euro.
Indeed, the road ahead for Europe looks bumpy. There are many more challenges. It’s not as if leaders got together at last week’s G20 and agreed to some specific measures which are a magic cure. We should unfortunately expect more volatile times ahead; both for countries within the eurozone, and for countries like Australia, where the stock market rises and falls because of concerns about the global economy. We may think we are insulated from the problems down under – but we are not.
France has a major problem with its bond yields, and it needs to look at the medium and longer term vision of the eurozone to see what it can do beyond austerity measures. It needs to create economic growth. Ultimately some eurozone countries might need more support from China or other solvent counties to ease the problem.
Fariborz Moshirian is a Professor of Finance at the Australian School of Business.
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