We are now witnessing game changing events in Europe. Silvio Berlusconi is gone but markets are worried about an Italian default. Interest rates on Italian bonds have risen above seven per cent, a new euro-era high. Basically, it means investors think Italy will go bust. The problem is that it's the eighth largest economy in the world and the fourth biggest in Europe.
In a gloomy report this week, Barclays says: "Italy now mathematically beyond point of no return." Even if there is growth and even if there are budget cuts, Barclays says it won't be enough to ease the debt problem. "Contagion is alive and well," said Rebecca Patterson, chief market strategist at J.P. Morgan Asset Management told the New York Times. "People are wondering if we've moved to a new level of the crisis."
Meanwhile, economist Nouriel Roubini says Greece can only default and abandon the Euro.
Roubini says a break-up is painful and costly, but a rotten marriage is worse. What's needed, he says, is an orderly divorce.
"Greece is insolvent, uncompetitive and stuck in an ever-deepening depression, exacerbated by harsh and excessive fiscal consolidation,'' Roubini says. "It is time for the country to default in an orderly manner on its public debt, exit the eurozone (EZ) and return to the drachma to rapidly restore solvency, competitiveness and growth."
The crisis has definitely moved into a new and dangerous stage. In 12 months time, the EU is going to look very different.