Fiddling while Rome burns

I’ve been waiting to use that headline for a while, and the news that Standard & Poor’s has downgraded Italy’s credit rating to A is too good an opportunity to miss. And just in case you were thinking that A still sounds pretty good, remember that A comes after AAA, AA+, AA, AA- and A+.

The reason for the downgrade is that S&P do not believe that the Italian government will be able to bring their public finances under control. This coupled with weak growth and Europe’s second-highest level of accumulated debt, means that lending money to the Italian state is becoming an increasingly risky business.

At the heart of this is political failure. Successive Italian governments have failed to liberalize their economy, failed to tackle corruption, and failed to manage the public finances responsibly. Put simply, they have proved utterly unable to take on the various special interests strangling the economic life out of the country. Even now, faced with a looming crisis and potential humiliation, the Italian government does not seem able to act decisively. And this in the world’s eighth largest economy.

But this problem is hardly exclusive to Italy. Indeed, this is an all-too-familiar story, which has been played out, and continues to be played out, in developed democracies the world over. Continental Europe may be the eye of the storm, but things aren’t exactly looking rosy for Britain, the United States and Japan either. Political short-termism has become chronic, and perhaps even terminal.

This is the path we’re walking down: highly indebted sovereigns will keep on borrowing money until investors lose confidence and the bond bubble bursts, at which point interest rates will skyrocket. What follows could easily be brutal, with some combination of widespread defaults, banking collapses, and eventual hyperinflations (as governments turn on the printing presses in a last ditch effort to keep the show on the road) an all-too-real possibility.

It doesn’t have to be that way. It isn’t too late to do the hard but necessary work of cutting spending, fixing the banks, and freeing entrepreneurs to grow the private sector economy. The only alternative – you guessed it – is playing the fiddle while Rome burns.

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