by Paul Lines

Created on: November 16, 2011   Last Updated: November 17, 2011

Italy is the second country within the Eurozone to finding itself in debt crisis that has led to the downfall of the elected prime minster and the election of a to a high of 7%. The key question being asked should Italy be forced to ask for a bailout is what impact this is likely to have upon the Eurozone as an integrated financial market.

Italy is a much larger economy than Greece, the last country to ask for a bailout. Furthermore, the level of its current sovereign debt is much greater at €€1.9 trillion ($2.6 trillion), which represents 120% of GDP and is three times the size of Greece. Therefore, it follows that pro-rata the bailout required would be in the region of €600 billion. This is far beyond the current amount available from the

European Financial Stability Fund (EFSF). Consequently, a bailout of Italy would mean that either the European Central Bank would have to step in as a lender of last resort, which Germany is totally opposed to, or the stronger economies of the EU would have to provide more help, with most countries being reluctant to take this route.

Germany and France are becoming increasingly concerned about the increasing sovereign Debt crisis in its member states. Such is the level of concern that there has even been rumours of the creation of a two-tier Eurozone, with the stronger northern European economies in the top tier and other weaker southern European economies in the lower tier. However, in reality this outcome is considered extremely unlikely as there is a serious likelihood that such a move would increase rather than reduce the currently levels of volatility in the Eurozone financial markets and indeed, across the world. It follows that if such further volatility were to occur, the chances of a ‘double-dip’ recession in the region increases dramatically, as do the chance of a second banking and financial crisis.

It is the opinion of this author that, if Italy were to require a bailout, which looks increasingly likely, the stronger Eurozone members, particularly Germany and France, will seek another solutions, a new model to ensure appropriate management of sovereign debt. Evidence of that model already exists in embryonic style with the appointment of non-elected technocrats as leaders of Greece and now Italy. Should Italy receive a bailout it would not be inconceivable that these stronger countries would seek to create a central technocratic body to manage the fiscal and borrowing policies for the majority, if not all Eurozone member states.

If this prediction were to come true it means that effectively, apart from minor areas of national government responsibilities, democracy would cease to exist. Financial markets, investors, speculators and governments in other developed countries need to consider the consequences of this potential scenario. It would effectively remove a key element of democratic freedoms upon which capitalism and free markets were built upon, which does not present a very comforting prospect.

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