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José Luis Álvarez Arce, Dept. of Economics, University of Navarra, Spain

Is there a danger of a contagion effect?

Wed, 09 Nov 2011 10:57:55 +0000 Published in

-With the status Greece and the latest events in Italy, is there a danger of a contagion effect that could drag Italy and Spain down?

-The danger of contagion always exists because, although part of the tensions in the markets have their origin in real and objective problems in each country, risk premiums are the result of the perception that investors have, not only about the status of the Economics in question, but also about what other investors will do. And that is beyond a minimally reliable prediction. Now, if these countries undertake reforms that improve their growth prospects, that contagion effect will be less likely to occur. In the specific case of Italy, it seems that the economic difficulties it is experiencing are being exacerbated by a very tense political climate, which should be calmed.

-Is it possible to rescue Italy with the GDP it has and its public debt?

-Of course, rescuing Italy would be a colossal task given the size of its public debt, which stands at 1.9 trillion euros, i.e. 120% of GDP. Right now, in the absence of recently announced measures, it does not seem that the mechanisms available to the European Union can cope with a possible bailout of such magnitude.

-Would Spain be the next to fall?

-Spain has improved its position, if only in relative terms, due to the worsening of Italy's problems (a sad consolation, by the way). But pressures persist in our sovereign debt market, especially given the deteriorating macroeconomic outlook, with poor growth and unemployment data . status We are probably at a time when the markets are impatiently awaiting the results of the upcoming elections to clarify the direction our economic policy will take and to assess whether it will allow us to achieve a sustained recovery. Important decisions await the next government, and they will not be popular. Whoever wins, favorite or otherwise, would do well to devote time to an effort to clarify why and how their policy can brighten the horizon. In other words, more didacticism and less dogmatism.