On Dec. 8, leaders of 27 European Union countries gathered in Brussels in an attempt to find a way out of the mess in which Europe now finds itself. With waves of debt engulfing Greece, Portugal, Ireland — and perhaps even Italy, the world’s eighth largest economy — the continent has never faced a greater post-war crisis. Even the Pope recently invoked divine support for Europe and Italy.
The emerging Italian debt crisis is a complex issue, to be sure, but I believe it’s one that Americans should care about — because the decisions made in Rome and Brussels today could affect many of us tomorrow. Here’s why.
The problems facing Italy are numerous and complicated, but they essentially boil down to this: for decades politicians there have spent way too much, racking up a huge national debt that is now much larger than the entire Italian economy. Like their Greek counterparts, Italian officials put off controversial structural reforms and budgetary restraint — even though the necessity of both was clear — for years, continually kicking the can to the next administration.
Those who lent that money to the Italians realize they may not get it back, and Italy’s borrowing costs have shot up dramatically. As a
result, the elected government in Rome was recently compelled to resign — in its place, an unelected emergency cabinet was installed to implement a draconian austerity plan it hopes will keep the country from having to declare bankruptcy.
The stakes are high; if Italy — with an economy six times the size of Greece — defaults on its debt, there will be significant repercussions around the world. Of course, a default would almost assuredly mark the end of the Euro currency and, perhaps, of the European Union itself. But, for Americans at least, there could be more worrying effects.
By defaulting, Italy would essentially be saying that it did not have the ability to pay back what it owes, which would result in massive losses for the creditors that hold its debt; some of the creditors are banks that would suffer huge losses, while others are investors who, by not being repaid, may have to default on their debts. All together, this would spread an international contagion that could lead to bank failures around the world. American banks don’t hold huge amounts of this bad debt, but even $100 billion or less would cause huge ripples in our banking system and economy.
Italians can still turn this around, but it will take laser-focused fiscal discipline on their part. And it will be painful. The most frustrating part is that this situation could have been avoided. For instance, it was clear years ago that a social-security system that allowed citizens to begin receiving benefits in their 50s was unsustainable. Previous governments could have reformed the system and spared today’s heartache. They did not. As a result, the Financial Times pointed out that the new unelected government has been forced to take “a hatchet” to Italy’s pension system, sparking nationwide protests. The welfare minister broke down in tears as she announced the plan on television.
Italy’s predicament is another testament to the failure of Europe’s high-tax, high-spending “social-democratic” model — the very model the Obama Administration seeks to emulate here at home — which has resulted in debt-propelled misery for millions. Moreover, the crises created by this failed model have now spun so far out of control that they are no longer just an Italian problem or even a European problem — they are now everyone’s problem.
Of course, there are important lessons for our country in this crisis, namely about the necessity of significantly reducing spending before we too find ourselves teetering on the precipice of default. And, with the evidence of what runaway spending and massive borrowing and debt does to a nation, it’s important that the United States take such steps now so that we don’t end up in the same situation as Italy.
The new Italian government faces a difficult task, but it must succeed — for the sake of all who would be affected by an Italian default.
Sen. Jon Kyl is the Senate Republican Whip and serves on the Senate Finance and Judiciary committees. Visit his Web site at www.kyl.senate.gov or his YouTube channel at www.youtube.com/senjonkyl.