Martin Wolf in the FT makes an interesting case for Europe (i.e., Germany) saving Italy from self-immolation. Unfortunately, he seems to suggest that this can only be done by Germany coughing up lots of dough. Why this is both economically and politically not a sensible approach is explained in my comment on his article (but his charts are well worth examining - click on the link on the left half way down the text):
What
is more important than new governments in Italy and Greece is a new
economic approach in Germany. Letting the ECB act as lender of last
resort and pursuing German expansion and upward wage revision would be a
much more effective and socially just approach than deflation and
austerity in the periphery. It would not even cost Germany anything,
would compensate in a timely manner for the slacking off of external
export demand, and address the competitiveness problem constructively.
The notion that Germany should bear the costs of a periphery condemned
by its own wage restraint to basket-case status is economically
senseless and a political nonstarter. Especially when a mutually
profitable solution is available - core expansion - once the blinders of
received wisdom are abandoned. If the new Italian and Greek
governments' only raison d'etre is to force more deflation on their
peoples their prospects are bleak.
