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Ever since the collapse of Lehman Brothers, contagion has become the stuff of policymakers’ nightmares. In recent weeks, with the very real prospect of default by European countries, the sleepless nights are returning. This column provides evidence that markets are bundling all European countries together. They believe that if Italy defaults, it would mean the […]

Little Time for Italy

The Eurozone crisis now extends to Italy. Markets’ pricing of credit default swaps shows that Italy’s troubles are home-baked and that matters are rapidly coming to a head. The risk of default has now become concentrated on the very short run. This suggests that Eurozone leaders may be rapidly punished by markets if they fail […]

The Fear of Contagion in Europe

Most analysts agree that Greece is insolvent. This column argues that the issue is whether Greece’s troubles are contagious.   What to do about Greece? So far, much of the debate has split into two camps: bail-in-ers, the advocates of coercive (but soft) restructuring of Greek debt, and bail-out-ers, those who favour the procrastination of […]

Will the Irish Crisis Spread to Italy?

Here we go again with talks of the end of the Euro. This time, however, the row was stirred by President of the European Council in person, Mr. Van Rumpuy.   The reason for this alarm is well known. As soon as it became evident that Greece would miss, albeit slightly, the deficit reduction targets agreed with the IMF and the UE, the nightmares of Ireland and Portugal default immediately materialized. the European Union, together with the European Central Bank and International Monetary Fund are now keen  to draw  a recalcitrant Ireland into accepting a life-jacket package (with strings) of 80-90 billion Euro,  that would stop, in the EU mind,  the disease from spreading to other vulnerable countries. Clearly, the ultimate crack would be Italy’s default.

The Cost of Political Instability: The Italian Case

Many countries in Europe now have a coalition government. This column uses data from Italy to argue that this comes at a cost. It finds a positive and significant relationship between the political instability caused and a rise in government yields, making today’s fiscal adjustments even more difficult and painful.   

Across Europe, coalition governments are taking a battering. In April, the Belgian coalition government collapsed after only five months. In the UK, just four months after forming its first coalition government in over 30 years, the ruling parties enter their annual conferences already on the defensive. In the Netherlands, three months after elections, the country is still waiting for a new government as coalition talks have stalled. Many commentators will emphasise the need for “stable government”; here we examine Italy’s coalition government to identify whether that cliche is true.