To avoid the spread of contagion as well as deflect any potential fallout from the bubbling kettle that is the Italian economy, France has taken moves to pass austerity measures which are some of the most stringent the country has seen since the end of World War II. The new package includes cuts of 112 billion euros, new taxes, cuts to pensions, schools, health and welfare as well as a rise in the VAT tax on construction and restaurants. During the 1930s Pierre Laval attempted similar measures to keep France on the Gold Standard which ultimately plunged the nation into the depths of the Great Depression. France is acting in response to the situation in Greece and the deteriorating situation in Italy with the collapse of Prime Minister Berlusconi’s government and increasing warnings from financial institutions regarding Italy’s fiscal health.
Additionally, the euro zone as a whole is on the brink of recession with weak economic reports coming out of Germany. Yields on Italian bonds have spiked and the growing crisis threatens European banks through risk of exposure. The Telegraph tells us that Goldman Sachs has warned that Italy may have to make, “unilateral decisions such as seizing banks or clamping down on the bond market (effecting holding investors captive) if the political climate deteriorates further and authorities feel boxed in. It said the crisis has set off a ‘self-fulfilling dynamic’ that may ultimately make it impossible for Italy to roll over debt.” Giuseppe Ragusa from Luiss Guido Carli University claims that the European Financial Stability Facility is, “doomed to be worthless” with respect to Italy’s situation and states that the European Central Bank is the only answer to Italy’s problem but ECB board member José Manuel González-Páramo warned that the ECB is not a “lender of last resort.” Joachim Fels from Morgan Stanley thinks the crisis has been precipitated in part by discussions on the part of the European Monetary Union to possibly kick Greece out of the euro, causing investor confidence to deteriorate and leading to a run on banks and sovereign debt holdings in other countries that could preclude a full blown meltdown.