Spain has no options, but Italy does.
Italy can and should avoid engaging with the EFSF for two reasons.
First, Italy’s economic situation is very different from Spain’s.
- Spain will have to accept EFSF conditionality in order to persuade the ECB to buy its bonds.
- Italy is different; Italy should not bow to the EFSF and submit itself to its conditionality in order to persuade the ECB to buy its bonds.
Italy can and should avoid engaging with the EFSF for two reasons.
First, Italy’s economic situation is very different from Spain’s.
- There was no real estate bubble; Italian banks are weakened by the recession but their balance sheets do not bear the legacy of piles of mortgages gone sour.
- At 123% of GDP, public debt is extremely high, but the government runs a primary surplus – 3.4% of GDP this year – while Spain has a primary deficits of 3.3% (1.9% in France).
- Italy’s net external position is balanced which Spain run current account deficits close to 10% of GDP per year over a decade.
- If Italians were to swap their foreign assets with the government bonds held abroad, Italy would look like Japan: a high-debt country but one in which all of the debt is held domestically.
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