More cuts may hurt Italy and Spain
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Once again Europe's leadership has been forced to put up billions in cash to halt the spread of contagion to the Continent's weaker economies, this time in the form of a potentially vast purchase of Italian and Spanish government bonds by the European Central Bank. And once again the condition for rescue is more austerity.
But this time there is a difference. Unlike Greece, Portugal and Ireland -- the patients previously forced into the austerity cure -- Italy and Spain have already made their own substantial strides toward cutting their deficits.
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 eurozone'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 eurozone, with both expected to be below 1 percent this year. And official projections show little improvement coming next year.
Italy has been on target to bring its deficit down to 3.9 percent of gross domestic product this year. And, under further pressure from Germany and the ECB last week, Prime Minister Silvio Berlusconi, said the cutting would be sped up with the aim of Italy balancing its budget by 2013.
Spain is set to pare its deficit to 6 percent of economic output, down from 9 percent. Yet Spain, too, is under pressure from its European partners to cut more.
First Published August 9, 2011 12:00 am
