Conspicuous absences

Europe has left the handling of its deep-rooted debt crisis to the individual governments of its member states. The Italian Senate on Thursday approved an austerity plan that, along with budget cuts, will see tax hikes, further privatization of state enterprises and the application of a hefty copayment scheme for health-service users (up to 10 euros for visits to the doctor, and 25 euros for emergency services). The aim is to save up to 70 billion euros by 2014. The plan seems ambitious, but its scope risks reduction at the hands of a government known for creative accounting; in any event, it certainly reflects the fear in Italy prompted by the increased risk premium the government must pay to borrow on the international money markets. In short, the reality of the Italian economy has little to do with the picture of rude health painted by Prime Minister Silvio Berlusconi, although this is hardly surprising given that he has little financial skill other than when applied to his own affairs. The Italian economy has barely grown over the last decade, and is mired in debt; it is unlikely to register much growth in the coming 10 years.

Sadly, the credibility of the Italian austerity plan (although for the moment it seems to have calmed the markets here and in Italy) is severely undermined by the inexplicable absence of two key players: firstly, Berlusconi, nowhere to be seen at the worst moment of the financial crisis, has confirmed that he is not fit to govern. The political chaos stirred up by the Italian prime minister (including a very public spat with his finance minister), is hardly the guarantee of credible government that Brussels and the money markets are looking for right now.

Arguably of greater concern is the absence of Europe in all of this. Germany has rejected proposals to hold an extraordinary summit of the members of the single currency to address the chaos being caused by national debt. What's surprising about this is not Germany's reticence; it's no secret that Angela Merkel and her allies in The Netherlands and Austria would prefer a Hanseatic League rather than a common currency shared with Spain, Greece and Portugal. What is puzzling is the reason given by the EU's chief executive, Herman van Rompuy: "Greece has sufficient financing until September, and there is no need to bring forward a second rescue package." But this is exactly what investors want: for Europe to show right now that it has some ideas about how to save Greece and avoid a second round of rescue packages for Ireland and Portugal.

Reduced chances of recovery

What Merkel and her supporters fail to realize is that Greece cannot continue in this state of suspended animation for another two months; they also refuse to understand that if it does, it is not only reducing Greece's chances of recovery, but also those of Italy and Spain. So while Germany refuses to buy up euro-zone members' debt on the basis that nations are responsible at the individual level for their governments' excesses, Spain, already subject to tight fiscal restrictions, can only stand by and watch as the costs of its borrowing continue to soar as a result of European indecision. Each basis-point increase costs millions of euros in interest repayments, which will wipe out any savings made by spending cuts. Berlin's shortsightedness is costing Rome and Madrid both jobs and money.