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The Editorial Board of the Washington Post on the challenges facing Mario Monti, the new prime minister, and the Italian people in 2012-2015.

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The joint statement after the G-8 summit stated that "our imperative is to promote growth and jobs." It stated the budget deficits need to be addressed but said "spending cuts must "take into account countries' evolving economic conditions and underpin confidence and economy recovery." Germany's Merkel in her remarks said growth and deficit reduction supported each other, that "we have to work on both paths, and the participants have made clear, and I think this is great progress." Opposition Social Democrats in Germany say Ms. Merkel is adept at changing as the situation changes, and it appears Merkel is making the transition away from strict austerity policies she had championed earlier. Especially now with fresh elections in France, Netherlands and Greece, and the election of Francois Hollande on a pro-growth platform, the German position of strict austerity is being increasingly questioned on all sides. French president Hollande met U.S. president Obama at a pre-arranged meeting prior to the summit. Obama and Hollande see the need to reduce high unemployment in the U.S. and Europe by encouraging growth, creating a common interest....

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About $229 billion, three fourth of Greece's debt, is now held by the European Central Bank, the IMF and the European Commission. This is taxpayer money and the governments are making sure that they get back bailout loans in the form of interest payments. About two thirds of the $177 billion given to Greece as bailout loans since May 2010 actually came back to the ECB, IMF, and the EC, in the form of interest. The ECB is keen on recovering taxpayer money. The money route has been setup with an escrow account in Greece for bailout loans so that interest payments get paid, and this money cannot be used for any other purpose. Banking experts say this is a practice in risk management, and with Greece's poor record in finances the controls have been put in place to recover money the ECB invested in Greek bonds in an effort to calm nervous financial markets and now gets about 10% in annual interest payment. Under earlier debt restructuring for private creditors to Greece a haircut of over 50% on Greek bonds was taken, with the ECB insisting on receiving full payment. If Greece were to repudiate the loans under a new elected government losses would have to be taken by the ECB, IMF, and EC, and by private creditors. The ECB has Greek bonds in the range of $44 billion to $69 billion, and the European Financial Stability Facility $88 billion, by some estimates. Greece's exit from the euro would result in losses on these bonds .for the ECB and the EFSF, ultimately European taxpayers. It would also make the new bonds to private creditors under the restructuring of little value which is why European banks would not favor that outcome. Greece's tax receipts at some point, possibly 2013, would exceed basic operating expenses of the government, at which point a future Greek government might decide to exit the euro and stop interest payments on debt in its best interest....

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The Gallois Report and France's efforts to improve competitiveness under the Hollande administration.

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Christopher Wood points to deflationary trends in Europe and the USA. Bank for International Settlements (BIS) data shows European bank exposure to government debt in Portugal, Italy, Ireland, Greece and Spain at $2.8 trillion at the end of 2009, and a rise in the London interbank offered rate (LIBOR), as further signs of negative trends. The property bubble in China and strong action to tighten and use antispeculation measures have already led to transaction volumes in residential real estate falling rapidly. If Beijing reconsiders further appreciation of the yuan, a trade debate with the U.S. may intensify. All this points to increasing risk of a double dip recession.

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Germany's parliament, the Bundestag, ratified the fiscal pact agreement of eurozone countries of December 2011 on June 29, 2012. A two thirds majority was needed to approve the pact and the rescue fund called the European Financial Stability Facility or European Stability Mechanism. To get the opposition Social Democrats support chancellor Merkel had to agree to a "growth pact" at the June 2012 EU summit, a condition made by the opposition. Facing persistent German opposition in the negotiations for short term measures to allow the rescue fund to buy Spanish and Italian bonds directly in private markets and give direct aid to Spanish and Italian banks, prime minister Monti of Italy and prime minister Rajoy of Spain as a last resort told chancellor Merkel they would block the EU growth measures. It is at that point that Merkel made the concessions to allow direct aid by the rescue fund. Blocking the growth measures would have blocked the approval of the fiscal pact which Merkel had negotiated in December 2011, as the opposition Social Democrats would then withdraw their support. It is this manouevre that finally achieved a breakthrough in the marathon 14 hour negotations between Mario Monti and Angela Merkel, which Monti described as "hard and tense" but "worth it." ...

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Greek tax evasion is estimated by three economists who studied data from Greek banks at about $11 billion based on a 40% tax rate, a third of the country's annual deficit for 2009. Unreported income is estimated at $28 billion. Doctors, dentists, lawyers, architects, engineers are the biggest groups underreporting income. Greece's parliament took up a bill in 2010 but the bill failed because of oposition from these groups. It remains to be seen if the Samaras government with support of the IMF-EC can take action similiar to that taken by the Monti government in Italy to go after tax evaders. By cutting the minimum wage and incomes of lower income groups disproportionately compared to cracking down on tax evasion and protecting incomes of higher income groups the economic plan for Greece proposed by the IMF-EC and the Greek government becomes unworkable and threatens the social fabric. By not raising this issue Germany's media and government have appeared callous in their pursuit of austerity measures as working class Greeks protested in Athens in 2011-2012, even though some of the issues raised by the Germans are legitimate. France and Italy are imposing a wealth tax to cut the deficit but this is not taking place in Greece. Global financial media has also not reported adequately on these aspects of the problem in Greece and Italy....

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Krugman points out that the prevailing bias in the US distorts the facts about Europe's performance. Frankfurt, London and Paris he says are just as lively and modern as New York and Chicago. They are not poor and backward. When you factor out population growth in the USA, since 1980 per capita real GDP which is what affects living standards has grown in America at about the same rate as the 15 European Union countries: 1.95 percent in the USA vs. 1.83 percent for the EU. And for the 25-54 years working age group unemployment in the EU 15 countries in 2008 was 80% of adults (83% in France), which is about the same as in the USA. The French and Germans work fewer hours but output per hour is close to American levels.

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Wall Street Journal reporters Walker in Berlin, Forelle in Brussels, and Meichtry in Rome, reconstruct the events during critical days after the indecision and failure to reach agreement during the July summit of eurozone countries. This took the form of intervews with leading players and over 25 policy makers. What emerges are accounts of how Germany's Angela Merkel, daughter of a Lutheran pastor, and protege of Eurozone founder, former German chancellor Helmut Kohl, handled the crisis. Merkel was widely criticized in the media for indecision. What emerges is an account of a leader who took decisive action at key moments in the crisis- leading to the formation of new governments in Greece and Italy taking action to improve finances, and negotiations with banks represented by the International Finance Corporation leading to acceptance by banks of a 50% loss on loans to Greece to reduce Greece's unsustainable debt burden. Merkel also worked with the European Central Bank's departing president Frenchman Claude Trichet and new president Italian Mario Draghi to resist French president Sarkozy's efforts to have the ECB assume responsibility for the crisis through large scale buying of Italian and Spanish bonds; which was opposed by German public opinion as a backdoor way of having German taxpayers assume responsibility for European debt. Shown are three critical moments when Merkel intervened. In October 2011, after Italian prime minister Berlusconi reneged on promises to make pension and other reforms to improve Italian finances because of political resistance. He survived a parliamentary no-confidence vote by one vote. Merkel took the lead on October 20, by directly calling Italian President Georgio Napolitano on the phone, to urge him to take action for forming a new government in Italy. The result was Napolitano talking with all political parties to form a new government, leading to the formation of a government by a non-political figure respected in Italy, former EU commissioner Mario Monti. A day earlier, on October 19, French President Sarkozy met ECB president, Trichet, at an event honoring him as departing ECB president in Frankfurt's Alte Oper concert hall. Trichet, Merkel and Sarkozy met in a side room. Sarkozy asked for decisive help from the ECB for large scale buying of Italian and Spanish bonds to lower yields, which had reached 7% on Italian bonds. Trichet responded that the ECB's charter did not allow it to finance governments, with the meeting ending in a shouting match between the two leaders. On October 21, EU and IMF inspectors warned that Greece's debt was reaching unsustainable proportions and austerity measures alone would not work, unless the bondholders, the European banks, took losses of 60% on their excessive lending to Greece. At this point France agreed to the German position arguing for this level of bondholder haircuts or losses, fearing the prospect of large future bailouts that would jeopardize France's triple AAA credit rating. The July 2011 summit accord had only provided for 10% in losses for bondholders. On October 27, at a meeting that went past midnight, Merkel and Sarkozy called IIF head Charles Dallara, who headed negotiating for the banks, to EU headquarters in Brussels. Merkel handed Dallara an agreement containing the 50% bondholder loss demand, and told Dallara- "This is the last offer." Merkel was saying banks would be left with nothing if they rejected it and Greece defaulted. Dallara called bankers and the IIF accepted Merkel's agreement. The final moment that October came on October 31, when Greece's prime minister Papandreou said he would call a referendum on the bailout provisions and austerity measures demanded by the IMF, the EU and the ECB. Bond markets reacted negatively to the announcement fearing a rejection and a Greek default. The Group of 20 leaders was meeting in Cannes, France on Nov. 2, 2011. Papandreou was asked to come to Cannes for a pre-summit meeting. Here Merkel told Papandreou- "the real question" for the referendum was, "Do you want to be in the euro, or not?" Days later Papandreou, lacking support in Greece from political parties and opposition inside his party, submitted his resignation. A non-political figure respected in Greece, former ECB vice president, Lucas Papademos, was appointed prime minister to head a Unity government. Polls after the appointment showed three fourths of Greeks said that this was "a positive step for Greece," with Papandreou's party getting only 11% support and the opposition led by Samaras about 20%. The criticism leveled at Merkel is that Germany should take responsibility for debt throughout the euro area through the issuance of eurozone bonds or the ECB buying large amount of bonds of Spain and Italy. Merkel faced strong opposition inside Germany and from the Bundesbank to this idea. The other criticism was based on austerity measures worsening the finances of Greece because of a lack of growth in the economy, which is true; yet Germany may see the situation in Greece as taking a long time to be resolved in any event because of excessive and faulty financial management. For Italy and Spain putting finances in order was a necessity, and austerity measures should lead to short term sacrifice but improve prospects for the long term by returning the economies to growth. Another criticism is the installation of governments that lack popular or electoral support. As the polls in Greece showed the Unity government there has far greater support and public opinion blames the politicians for the huge mess. In Italy, Berlusconi was widely seen as losing popular support when he resigned. And in Spain Mariano Rajoy, the newly elected prime minister, was elected with a huge majority in parliament following winning in local government elections. Merkel also held her own party, the Chrisitian Democrats together at the recent Leipzig convention. Mario Draghi, was elected with German support to head the European Central Bank. He has long argued for better management of Italian finances as head of Italy's central bank. Draghi was able to support Merkel with carefully planned and managed actions. First to reduce interest rates to support economic growth in a slowing eurozone. Following this with the ECB's Long Term Financing Operation in late December 2011, to provide unlimited loans to European banks at 1% interest for three years in exchange for a broadened list of collateral deposited at the ECB. In a final twist in this drama, Charles Dallara, who was a key negotiator for the U.S. Treasury in setting up the Brady Bonds- that converted bad Latin American government debt owed to U.S. banks in the 1980's into long term debt with large reductions in principal owed and lower interest rates. This was in exchange for guaranteed repayment with 30 year U.S. zero coupon bonds. Dallara was now a negotiator for the banks to reduce the chance of the very same bondholder haircuts that he had negotiated in an earlier period to solve the Latin American debt crisis. Other players in the drama were Axel Weber, head of the Bundesbank, Germany's central bank, who resigned after strong and outspoken opposition to the ECB's large scale purchase of bonds of Greece, Italy and Spain. Jens Weidmann, his protege, who replaced him. And Jurgen Stark, German representative at the ECB, who also resigned in opposition to Germany assuming responsibility for eurozone debt. ...

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Louis Gallois, CEO of EADS gives his views about reviving European industrial competitiveness.

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Problems with the July 2011 plan for Greece and other troubled eurozone economies include the lack of funding and powers for the European Financial Stability Facility (EFSF). The contagion effects to Italy and Spain will require larger funding and powers for the EFSF for it to be able to deal with future crises. The bondholder debt haircut for Portuguese and Irish bondholders, and the sense that the crisis in Greece may have to be revisted yet again, are other issues that remain unresolved. Analysts sense that the EU's governance mechanisms are always a step behind in dealing with the repeated crises and EU leaders are doing only enough to get to the next crisis moment.

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The Journal editorial title suggests that Greece chose economic decline. It puts the responsibility for this choice on one political party that lied about its fiscal position, and another party that failed to take strong action. The government unions were uncooperative and resisted making changes. Making matters worse was policy from the EU that misread the Greece situation as a liquidity problem, and not as a solvency problem considering the huge debt Greece has piled up. And austerity measures pushed by the EU are doing little for growth- leading to an acceleration in the economic decline in recent months.

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Matteo Renzi, recently elected chief of Italy's ruling Democratic party, is likely to be the next prime minister as current prime minister Letta resigns. Letta's administration had come under increasing criticism from business and public opinion about the slow pace of economic changes in Italy. Italy's 2 trillion debt, or about $2.7 trillion, at 130% of GDP, and the declining GDP with little or no economic growth, is a problem for the eurozone. At the current pace of economic change the IMF forecast estimates only 0.5% annual growth in GDP till 2018. Foreign direct investment 2005-2011 is about one third of the eurozone average, according to the IMF, and Italy has failed to attract foreign investment for the last two decades with its weak political system and lack of competitiveness. By comparison Spain has seen an increase in exports and increasing foreign investment as it positions itself for a recovery. The austerity measures adopted by the Monti and Letta adminstrations in 2011-2013 helped to improve confidence in capital markets and lower borrowing rates, however this is clearly not the answer to Italy's problems of slow or no growth in the economy for the last decade. This is the problem Matteo Renzi, the 39 year old Mayor of Florence, is pushing to tackle as the mood in the country calls for aggressive action. Renzi's economic advisor is Filippo Taddei, who has a doctorate from Columbia University. He says at the core the issues are about what kind of "productive identity" Italy should have. Taxation that promotes higher rates of business investment is needed to promote growth, and creating a business climate that encourages investment in human capital and new technology. Payroll and business taxes take up about two thirds of a company's earnings leaving less for investment. Renzi is planning to take the centre left Democratic party in a new direction, "the road less travelled," as he put it in a televised speech, with innovative solutions including pro-market approach. As a first step he negotiated a deal with former premier Berlusconi for electoral reforms that would give a party or coalition winning electoral support a strong mandate to make and execute policy, without being hobbled in the way previous administrations were in the post war period. Lucrezia Reichlin, former head of research at the ECB, and Lorenzo Bini Smaghi, a former member of the ECB executive council, are candidates to be the economics minister in the Renzi administration....

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Gao Xiqing, vice chairman, president of China Investment Corporation, told a panel discussion during meetings of the International Monetary Fund, on September 24, 2011, China cannot be expected to provide solutions to the eurozone debt crisis. Xiqing said: "We're not saviors. We have to save ourselves." He added that CIC would consider buying bonds of troubled eurozone countries -"if it has a risk profile that fits into our allocation, but don't expect us to buy more than our risk appetite would take." And the head of China's central bank, Zhou Xiaochuan, told the panel that China cannot raise its growth rate because of inflation and other problems from unsustainable growth.

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Fiat plans to expand manufacturing in Italy by making the Panda small car in Italy instead of using a plant in Poland. This would expand production by Fiat in Italy from 650,000 to 900,000 cars, with an investment of 8 billion euros in 2 years. One of 5 unions gets 40% of the vote at the Fiat plant in southern Italy that will make the Panda. Fiat had asked for new working conditions at the plant in exchange for its investment and a new social pact with the unions.

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The caretaker government of prime minister Mark Rutte in the Netherlands will commit to following austerity plans in its Stability Program report to the European Union. Elections are now set for September 12, 2012. The government was able to get the support of two smaller left-leaning parties to austerity plans. Opposition parties have questioned the policies and said they will reverse them if elected. Rutte's Liberal party and Jaeger's Christian Democrats, with the help of the Christenunie, D66, and Groenlinks, now hold a slim 2 seat majority in the 150 seat Dutch parliament. The Freedom party that had previously supported Rutte withdrew support for austerity policies that it said would hurt pensioners. The moves help avert a credit ratings drop by the credit ratings agencies leading to a loss of the Dutch triple A credit rating. The measures will increase the sales tax from 19% to 21%, make health care spending cuts and impose a pay freeze on civil servants. Savings achieved will be 11 billion euros. Rutte described his actions as: "the government's respose to the acute crisis in confidence in the financial markets." Earlier in the week Fitch Ratings had threatened to lower the Netherlands credit rating. The measures will reduce the Dutch deficit to 3% in 2013 from 4.5% in 2012 to meet EU fiscal compact rules. The changes to the health system are part of changes advocated by the OECD and the IMF because of surging health care costs for an aging Dutch population. There is concern about the sales tax increase because of its effect on consumer spending, and recent comments by S&P managing directors and others in financial markets emphasize the need for economic growth, as austerity measures by itself are inadequate solutions....

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Krugman questions whether the assumptions behind the austerity policies are true- that they would inspire confidence in economic recovery, or that in the absence of austerity policies borrowing costs would go through the roof. The recent events in Holland with the collapse of the government in the Netherlands- when a party leader supporting the government said he did not want to hurt pensioners in the Netherlands just to satisfy German opinion- and the mood in France with economic anxiety vote going to Marie Le Pen and Francois Hollande in the first round of presidential elections, shows that very little confidence has been created. High unemployment and economic anxiety are leading to a reappraisal of austerity cuts that depress the economy and reduce tax revenues, but Krugman says no changes are taking place to correct these policies. This is true for Spain with its high unemployment, and Britain which now has two quarters of negative growth.