Italian expenses are about 600 billion euros and about 200 billion euros in debt are coming due in the next year. Under the worst case scenario, Italy is shut out of the markets, it will have to pull off a fiscal adjustment of 200 billion euros in the next year, on top of what will surely be surging unemployment and collapsing banks that will need recapitalization. That means a 1/3 cut in total spending in the context of a collapse of the economy, all in one year. Even if Italy were not completely shut out of the markets, it would be foolish to issue debt at prohibitive yields, for this will only result in an ever-increasing spiral.
Politically, the best move for the next government is not to enact specific cuts upfront but to enact 'automatic' adjustments that legally mandate the government will reach its debt targets. The problem in Greece is that each new round of cuts needed a new vote. Instead, they should just pass one will that will contain with it automatic cuts whenever targets are not met. This way, the cuts are insulated from the political system. I think the focus should be on spending cuts, not tax increases, because taxes all face collection risk, whereas spending cuts only involve turning off the spigot. The government must assume strikes and massive civil disobedience and be prepared to crush them.
Alternatively, the new government can come into office on Day 1 and say 'f--k you' to Brussels, restore the lira. If they have the guts to do this (which I doubt) they will initially face near revolution, but if they can survive for 6-12 mo. eventually become the Kirchners of Italy and still be enjoying glory after 10 years.
Fascism in the name of our glorious GDP Gods, wonderful!
