The Greek financial crisis has occupied the media spotlight for many months and many Americans have grown tired of the on-going saga. But, if the Greek crisis were not enough trouble, now we have the added burden of the much larger Italian debt crisis.

The European Central Bank (ECB) spent most of November 9th buying Italian bonds in an effort to support prices and thus drive down yields on Italian sovereign debt from the unacceptable level of 7 percent. The question is: Does the ECB have enough resources to support Italian debt day in and day out? It is my opinion that the ECB will not have the resources to engage in such tactics for more than a few weeks, at best, and probably for only a few days – especially given the prevailing political environment. Time and time again, we have seen the failed results of government market interventions and, this time, the size of the problem seems overwhelming before interventions even start.

The real issue in both the Greek and Italian crises is whether the domestic political environments will allow for viable solutions. For several decades, voters in most developed countries (including the US) have elected officials who have enacted policies that essentially promise more to citizens than the specific country can afford. When revenues are less than necessary to make good on the promises, officials borrow money through the world's capital markets. And, the world's capital markets have responded with favorable terms based on the notion that surely, sovereign debt, above all else, is safe.

The idea that governments can turn to taxpayers for funds when notes become due has become a given. Until recently, lenders did not consider such systematic, long term trends as longer life spans, sharp rises in energy costs, declining fertility rates and reductions in aggregate productivity. Unfortunately, by the time elected officials recognized the financial realities (if they recognized them at all), there were no viable solutions because the necessary aggressive solutions were not politically feasible.

Now, Greece and Italy are among the first countries to arrive at the end of the era of financing unsustainable polices with additional debt. But, without abrupt and severe changes in the way their citizens will live going forward, there is little chance of eurozone help. Nevertheless, individuals are always very resistive to changes that lower their expected future standards of living. As a result, the Greek and Italian governments have fallen and cooler heads are now trying to form governments lead by technocrats. The hope is that, with no benign options left, technocrats will have more credibility with the citizenry when attempting to initiate harsh policies that will begin the process of returning to fiscal sustainability.

Without draconian austerity measures, Greece (sooner) and Italy (later) will almost certainly descend into uncontrolled default, which will have consequences for the global economy. With draconian austerity measures, a somewhat controlled default scenario is possible. (Recall, on Monday, November 7th, the major European banks agreed to take 50 percent write offs on the Greek debt they hold – this is controlled default.) But, there is no guarantee that technocrats can survive the inevitable political heat that will accompany draconian austerity measures. And, if they do survive, there is still a high probability of uncontrolled default.

For example, with significant reductions in government spending (in order to gain some degree of fiscal soundness), economies will quickly suffer significant negative GDP growth. That will reduce tax revenues and make interest payments on existing sovereign debt ever more vulnerable. Added risk will translate into higher debt costs for these countries, which will likely trigger even more government spending cutbacks. It is a vicious cycle, to say the least.

So, it seems that even with superhuman courage and leadership, the prospect of a controlled outcome for the greater European financial crisis is far from certain. Only time will tell if any officials are politically strong enough to avoid the unthinkable.

The author is a columnist with China.org.cn. For more information please visit: http://www.china.org.cn/opinion/tylorclaggett.htm

Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.

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