Italy Holds The Key

I believe that the EU can deal with whatever happens to Greece. If Greece did end up defaulting on all of its debt it would be painful but not insurmountable. I don't believe Greece will ultimately vote for drachmas over Euros but stranger things have happened.

Unlike the Greek issue, a solution to Italy's borrowing problems must be found. Reading between the lines, the EU is demanding reforms out of Italy in exchange for a bailout. These reforms are bitter pills to swallow politically. The EU is asking that Italy raise the retirement age. Older people tend to vote so passing this will not be popular. They are asking to reduce the number of politicians so essentially the politicians are being asked to vote their jobs away. They are also asking that lifetime employment rules be abolished, which will anger unions.

These reforms need to be done but are likely to cost the politicians who pass them their jobs. If Italy ultimately lives up to its end of the bargain I believe the EU will live up to its end of the bargain, even if it means using the ECB. Ultimately this is the way I believe it is most likely to play out. But it will be a bumpy road and it is not a sure thing.

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