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The Paradox of Greece and Italy in the Euro Crisis

Much of the attention about the European Sovereign Debt Crisis (ESDC) focuses on the issue of Greece defaulting on its public debt and the possibility of it being the first country to leave the Eurozone. However, the threat of Italy’s economic instability represents a greater concern for the European Union (EU). As Europe’s financial woes escalate the countries to bear to mind are Greece, Portugal, Spain, Ireland, and Italy, but the last stands out because its situation is unique. As one of the founding members of the European Steel and Coal Community (ESCC) and the European Economic Community (ECC), Italy’s issues represent a serious problem about the core foundations of the EU.

Greece which joined the EU in the 1980s represents a trend that is commonplace among the countries. When the ESCC was formed by the Les Six (Italy, Belgium, the Netherlands, West Germany, France, and Luxemburg) in the 1950s the goal was to tie the economies of Western European closer together.

The result was the creation of a custom union that linked the most developed European economies together, which has evolved into the current monetary union. Along with the Treaty of Rome came the creation of an institution that came to identify the concept of being part of “Europe.” From the onset, economic policy has been the key factor that unites “Europe.”

Participating members are expected to adhere to a set of sound economic principles. The simplified version is that members would try to limit public debt to 60% of Gross Domestic Product (GDP) and annual budget deficits to less than 3% of GDP. The key point is that the original members had existent developed and diverse industrialized economies.

The concept of being a “European” country made membership into the EEC highly desirable, especially to the “Les Six” underdeveloped neighbors. The “Mediterranean Countries” (Greece, Portugal, and Spain) sought to join to gain this national prestige. The issue was that until the 1970s military authoritarian governments that largely ignored economic development ruled these countries. When they made the transition to democracy, their first objective was to seek membership into the ECC, in order to gain access to financial institutions that would allow them to become developed nations. By the mid-1980s, they had made significant social and economic progress to join. Upon membership, these countries gained easy access to financial aid with luxurious terms from Brussels, which they spent to improve their infrastructure and social programs.

With the establishment of the EU in 1993 by the Maastricht Treaty and its expansion into Eastern Europe, the “Mediterranean Countries” faced competition for easily accessible lines of credit. By this time, the majority of these countries were experiencing rapid economic growth, which enabled them to continue their nondiscretionary spending habits. The prime example of this would be Greece, which precarious deficit spending habits only became known after the Great Recession burst its growth “bubble.” The restriction of credit because of the banking crisis has tied the hands of these government’s policymakers because deficit spending had been an important part in their long-term economic plans especially in case of a recession.

When Greece proceeded to seek a bailout from the International Monetary Fund and the European Central Bank, it was required to make severe budget cuts to meet calls for austerity, which have since resulted in another recession. While Greece’s situation remains an extreme example in the EU, its economic situation is closely related to Portugal and Spain in that the recession has resulted in massive unemployment and large budget deficits.

The situation in Athens has caught the majority of the attention about the ESDC, but the political, social, and economic links that tie it together with Spain and Portugal are nonexistent when it comes to Italy. The issue with Italy is that it has the second largest debt-to-GDP ratio, the first being Greece. However, in comparing the two countries’ financial history a different trend is illustrated. Italy’s budget deficit spending has only resulted in an increase in its debt-to-GDP ratio from 91% in 1990 to 117% in 2011, while Greece’s actions have resulted in an increase of 40% since 2000.

Italy’s current woes are not caused by overzealous government expenditures but are the result of a decade of sluggish economic growth. The Great Recession saw Italy lose 6% of its GDP in six consecutive quarters of loss, which it quickly recovered. However, the country is still running budget deficits that have placed it as a prime target for calls for austerity. The issue here is that balancing government budgets have become a one size fits all solution for the ESDC. In the case of Greece, austerity made sense at first because it was a cure for reckless government spending, but in the case of Italy, its financial policies have resulted in economic stagflation a situation only exaggerated by this solution.

The best way to put this paradox into perspective is to pose the question “What does it mean to be Europe?” The current crisis illustrates the fundamental inner divisions that exist in the EU. On one side, there is the group that forms the nucleus of the EU, the Western European countries that have come to dominate the institutions and policies of the larger collective. On the other, there exists the group that forms the appendages, those members that have joined during the rapid expansion of the EU over the last twenty-five years. The current crisis is not a revelation of any fundamental flaw of the whole but the result of adherent weakness that separate these two groups. Greece’s problems are caused by economic practices that are indigenous towards the “Mediterranean Countries.”

While substantial, they do not represent a threat as significant as Italy’s financial issues. Italy’s economic situation is a mirror image of the problems that afflict the core of the EU, the “Les Six.” Over the past two decades, every founder of the EU (the exception being Germany) has experienced slow economic growth and staggering public debt. An unresolved issue that will likely go unabated no matter what path Greece takes. What remains to be illustrated is to what depths each group is willing to go to further the concept of “Europe.” One thing remains clear though, austerity is not a long-term solution but only mitigation.