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The magic number in the European Union (EU) is seven. Seven percent represents the level of interest on Italian bond yields where refinancing that nation’s debt becomes unsustainable, according to most economists. Although Greece was the problem child of yesterday, Italy has become the main focus for the simplest of reasons: while the EU’s third largest economy may been seen as “too big to fail,” it may also be too big to save — and the fate of the European Union itself likely hangs in the balance.
Thus, it was of little surprise on Wednesday, when Italian bond yields surged to 7.4 percent, that both the European and American stock markets tanked, with the Dow shedding 389 points before the day ended. Nor was it any surprise that both markets stabilized on Thursday, when those yields dropped below the 7 percent threshold.
But the reason they dropped is no cause for optimism, despite the fact that the European Central Bank (ECB) bought Italian bonds, and Italy also sold $6.8 billion of one-year bills at 6.087 percent. Why? ECB Governing Council member Klaas Knot said the bank can’t do “much more” to stem the debt crisis, and the yield on the one-year bills is as high as its been since 1997, up more than 2.5 percent from the 3.57 percent they were sold at during the last auction only a month ago. Thus, despite any temporary reassurances to the contrary, the European Union remains the epicenter of fiscal instability.
And the fiscal instability has led directly to the political instability. Both Greece and Italy are undergoing dramatic transitions, virtually simultaneously. In Greece, former ECB vice president Lucas Papademos was named Prime Minister after getting the go-ahead from Greek President of the Republic Karolos Papoulias, whose position is largely ceremonial. His appointment follows the resignation of current Prime Minister George Papandreou. Papandreou, who triggered an EU-wide crisis last week when he announced that he would allow the Greek people to hold a referendum on the latest bailout package, was far more conciliatory on Wednesday. In a nationwide address, he said Greece would do whatever it takes to pull the country out of its economic doldrums.
According to the latest plan, the new government will be sworn in today at 9 AM EST, at which point the names of the new, or surviving, cabinet ministers will be announced. A key question to be answered is whether or not Evangelos Venizelos remains Finance Minister. Reports are that Papademos has accepted him staying on. Once the government is sworn in it must be formally approved, with that approval dependent on how soon the new government can put together its policy declarations. This can be likely done relatively quickly because most of what the new government chooses to do is constrained by the conditions of the bailout agreement forged in Brussels on October 27th.
Since the new government is being formed precisely for the purpose of meeting those conditions, the 300 members of the Greek parliament will more than likely move to a confidence vote as quickly as possible. Greece allows for three days of debate, or more if a large number of members wish to speak. The vote of approval takes place at midnight on the final day of debate. If everything proceeds as expected–a big if–Greece could have a new government sometime next week.
In Italy, after much political wrangling aimed at saving his job, Italian Prime Minister Silvio Berlusconi is expected to formally step down on Monday. Berlusconi had originally pledged to relinquish power after the Italian government passed the same kind of austerity measures the EU is demanding from Greece. Berlusconi was undoubtedly hoping that government dysfunction, epitomized by a fist fight among members of parliament last month, would enable the embattled prime minister to hold on into 2012.
Enter the magic number seven, or more precisely, the 7.4 interest Italy’s bond yield reached on Wednesday. The infighting of entrenched politicians determined to preserve their status quo of power and privilege, which had held up the transitional process, could no longer be sustained. The breakthrough occurred yesterday when Mr. Berlusconi’s People of Liberties party backed the idea of an emergency national unity government led by a non-politician or “technocrat.” This idea was backed by the center-left opposition Democratic Party and a centrist bloc of parties as well, including Future and Liberty, and the Union of the Center, comprised of former Christian Democrats.
The technocrat most likely to lead the emergency government is former European Commissioner Mario Monte, who was promoted by Italian president and respected elder statesman, Giorgio Napolitano. The 86-year-old Napolitano named Monte a “senator for life” on Wednesday, and the technocrat-turned-politician is expected be on hand in the senate today for the passage of Italy’s latest austerity measures. The senate is expected to approve those measures today, followed by the lower house on Saturday. If all goes according to plan–once again, a big if–Berlusconi steps down by Monday.
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