Politics Have Made Italy 'Too Big to Save'

Politics Have Made Italy 'Too Big to Save'

Politics Have Made Italy 'Too Big to Save'

Italy’s new Prime Minister-Designate Mario Monti is under a lot of pressure to form a new government that can implement what is sure to be unpopular reforms. And, according to Mercatus economist Garett Jones, Monti’s success will depend largely on his ability to avoid the politics that have brought Greece and Italy to the brink of collapse.

“The financial crisis made us all poorer than we used to be; but some of us haven't gotten the message. While we cut back, we haven't faced the real likelihood of a permanently worse future,” said Jones. “Italy and Greece are poster children for this unwillingness to face the future. They have weak political systems, based too much on dreams rather than facts. Now markets are pulling them back to reality.”  

Italy isn't too big to fail, but politicians have made it too big to save, because the chances of them implementing "rapid resolution mechanisms" or "bondholder bail-ins" are low, said Jones. And, that’s what would really help.

“As a matter of economics, there are still options that will save Italy: a corner-cutting 'speed bankruptcy' approach could put banks and insurance companies back in business quickly,” said Jones. “European courts could agree to allow Italian banks and insurance companies to cut back their payouts to sustainable levels, which would create short-term suffering, but it would create long-term sustainability.”  

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