It seems each time I finish my column and it goes up here on the blog, something else happens – like the threat to the Euro from the latest reverberations cascading across the continent. Last week it was Italy who was in trouble and now there are rumblings that France could find itself in difficult times, leaving only Germany as a relatively unscathed nation in the Euro Zone.
Germany Won't Be Unaffected Either
The thing is, Germany, for all that it has managed to weather the global recession better than most other countries is definitely not immune to threats to the Euro either. Remember that Germany has built their economy over the past few years on cheap trade with other countries in the Euro Zone and this means that the threat to the Euro would deeply affect them as well. In fact, if (and I still believe it's a long shot) the Euro does disintegrate, it will have disastrous effects for the entire planet.
But What about Italy?
Last week, I mentioned that Italy is in a much stronger position than Greece was and that, in spite of their heavy debt load, they are more likely to be able to weather the storm better than Greece. I still believe this and here's why: Italy simply is too big to fail.
Investors Won't Let It Happen
This has nothing to do with the other Euro zone governments either (well, it has to do with them as well – see below. However, it also has to do with self interest of debt holders). It has to do with the most basic of economics: Italy owes trillions of Euros in debts. This means that were they to go bankrupt and fail to pay those debts, they wouldn't just take the Euro zone with them, but they would also take all of their investors with them.
I firmly believe that while a handful of investors may try to do something stupid, like trying to pull their money when the money isn't there, most investors in Italian debt will realize they simply have no choice but to keep rolling over the debt and taking paper profits. Anything else means that they'll lose even more than they would if they didn't keep extending the debts out.
The Need to Reform
All this is to say nothing of the fact that the government of Europe all know that they must engage in real reform, namely that they need a central monetary policy is going to be difficult to achieve. And I do believe it will be achieved because enlightened self interest will make the nations of the Euro zone realize that they have no choice but to continue to be bound together. The fact is that while they might potentially shake off a return of the Drachma, a return of the Lira or even worse the Franc or the Deutsche Mark would be a disaster which would simply mean that all the nations of the zone will suffer.