By Grant de Graf
Italy has taken the step of approving major austerity legislation, announced by Italian Prime Minister Mario Monti. This will see significant cuts in government spending. The move is being heralded as a new turning point in the European Sovereign Debt Crisis and a step towards salvation. Unfortunately, there is one point that policy-makers are failing to grasp in dealing with the crisis: austerity is good for preventing a crisis, but it is not a remedy for resolving one.
Regrettably, this will mean that Italy will probably go the same way as Greece, Spain and Portugal. First they will have the demonstrations, then the riots; and then this shall be followed by a change in government.
Even Britain has acknowledged this phenomenon to some degree. Last week Prime Minister David Cameron announced an initiative that will facilitate the provision of further credit to small businesses. This is a positive step. The chance that such a program will be Shanghai-ed is a concern, as generally bureaucratic initiatives tend to be too top heavy and slow to make an impact on the market. The U.S. had a similar experience a few years a go, when at the height of the crisis they attempted to feed liquidity into the system. The single area that government funding failed to find expression was in the the small business sector, namely as a result of the strict lending conditions that were being imposed on banks by regulators. Hopefully, Britain will have a work-around solution. However, when it comes to government led initiatives, a positive expectation may be ill-conceived. One would suffer the risk of being accused of grasping at illusions of grandeur.
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