Charles Wyplosz on Italy’s “Bad Equilibrium”
This post was written by John McHale
Charles Wyplosz issues a stark warning here – a warning well worth heeding.
But is he too pessimistic? The fact is that the ECB has the power to cap bond yields. With bond yields capped at a reasonably low level – say 4.5 percent – the Italian government should be able to avoid default, even with a formal adjustment programme of structural reforms and fiscal adjustments. I doubt the programme would have to involve much beyond what the country is already doing. Mario Draghi has held out the promise – albeit maybe a bit too vaguely – of such support in return for conditionality. All sides have to move.