From Italy to the US, utopia vs reality – FT.com

    • From Italy to the US, utopia vs reality

    • In the eurozone, the fiscal crisis is lapping on Italy’s shores. In the US, the administration declares it will run out of funding early next month if the debt ceiling is not raised.

    • Far fewer Europeans than Americans believe public sector defaults are beneficial.

    • Europeans share with Republicans the view that there are still worse outcomes

    • reluctant Europeans, the eurozone must not be a “transfer union”

    • The fiscal crises we see are a legacy of the west’s private and public sector debt binges of recent decades.

    • McKinsey Global Institute tells us in an update of last year’s study of the aftermath of the credit bubble, this is an early stage of a painful process of deleveraging in several economies (see chart)

    • In some countries, notably Greece, easy credit led to an upsurge in public sector borrowing. In others, notably Italy, it encouraged governments to relax attention to debt reduction: its primary fiscal budget (before interest) moved from a surplus of 6 per cent of gross domestic product in 1997, before joining the currency union, to 0.6 per cent in 2005

    • Exploding fiscal deficits are mainly the result of collapses in activity and revenue rather than of bank bail-outs

    • But fiscal weakness then undermines the banks, partly because the latter hold large quantities of domestic public debt and partly because they rely on fiscal support

    • The 2011 deficit was forecast in 2008 to be a mere $54bn (0.3 per cent of GDP). But in the 2012 budget, it is forecast to be $1,645bn (10.9 per cent of GDP). 58 per cent of this rise is due to unexpectedly low revenue and only 42 per cent due to a surge in spending, both of these changes mostly due to the financial crisis, not the modest stimulus package (about 6 per cent of GDP)

    • The astonishing feature of the federal fiscal position is that revenues are forecast to be a mere 14.4 per cent of GDP in 2011

    • at the end of Ronald Reagan’s term, receipts were 18.2 per cent of GDP

    • many of the Republicans opposed to raising the US debt ceiling do not merely wish to curb federal spending: they enthusiastically desire a default.

    • Meanwhile in Europe, happily, nobody believes that defaults are good.

    • Europe is trapped in its own utopian project: the single currency.

    • These are dangerous times. The US may be on the verge of making among the biggest and least- necessary financial mistakes in world history.

    • The eurozone might be on the verge of a fiscal cum financial crisis that destroys not just the solvency of important countries but even the currency union and, at worst, much of the European project.

    • US, utopians of the right are seeking to smash the state that emerged from the 1930s and the second world war

    • In Europe, politicians are dealing with the legacy of a utopian project which requires a degree of solidarity that their peoples do not feel.

    • In late August, when I return from my break, we may know at least some of the answers.

Posted from Diigo. The rest of my favorite links are here.

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