Debt-laden Italy is likely to default, but Spain might just avoid it, according to the British think tank, the Centre for Economics and Business Research.
With the countries weighed down by debt, the think tank modelled “good” and “bad” economic scenarios for both.
It found that Italy will not avoid default unless it sees an unlikely big jump in economic growth.
Sometimes these predictions by clever-clogs think tanks are self-fulfilling because of the climate they create in the markets.
The Italians are an enormously proud people, and they would only permit their country to default on its obligations if faced with no other alternative, but the impact on their morale would be hard for them to take.
No – the problem for all the embattled European countries, is that they have tied themselves into a common currency, which entrenches their economic problems, and means that the options open to countries with their own currencies are just not open to the Italian and Spanish governments to self-correct.
It is the same problem we got into years and years ago when there was the ‘sterling area’ and later when we joined the exchange rate mechanism as a trial run for the Euro. We learned our lesson, but others are now learning the hard way.
Which is worse – devaluing your currency or defaulting on your loans?