Europe Needed to Boost US Economy

Who would have known that we’d be waiting on Europe to hit the upswing for the economy in the United States to get better? According to an article in the Washington Post, the world economy’s future is hinging on Europe’s ability to resolve its debt crisis.

Italy is one of the main issues when it comes to Europe being able to resolve the crisis. The gross domestic product (GDP) is $1.7 trillion and the national debt is currently $2.6 trillion and Italy is dangerously close to insolvency and too big for the rest of Europe to now bail out. Bond markets are charging Italy unsustainably high interest rates, and this isn’t going to change unless the country can start to shrink the debt-to-GDP ratio.

However, there is a new Prime Minister Mario Monti, who is a technocrat that has recently pushed a $43 billion deficit-reduction package through the Italian Parliament.

If everything goes to plan, the package would give Italy a balanced budget by 2013. This plan is weighted heavily on short-term property, sales, and fuel tax increases. This plan however, does cut funding for the country’s inefficient provincial and municipal governments. The Prime Minister has also reformed old-age pensions, which account for almost 30 percent of all public spending. He raised the retirement age and ending cost-of-living adjustments for better-off retirees. However, Italy can’t escape this dilemma unless it starts to grow again because its debt-to-GDP ratio rose because the economy expanded at an average rate of only .75 percent per year over the past 15 years.

The fundamental problem in Italy is its slow productivity growth, where a lot of it is related to legislation that shelters favored industries and professions from competition and makes it nearly impossible to fire workers in firms with more than 15 employees.

There is of course, politics embedded into this as well. There is a cohort of dwindling young people who are complaining that family and personal connections, not skills, determine who will get ahead in the job market.