Italy faces either bailout or default – economist

European Commission President Jose Manuel Barroso joined the fight to lift the region out of its financial pit, calling for expanding the EU bailout fund to help deal with the crushing debt borne by the major Euro-zone economies of Spain and Italy.

Barroso also wants the bailout fund to be able to buy government bonds.

On Wednesday, Italy’s prime minister, Silvio Berlusconi, attempted to reassure markets, saying the country's economy rested on a solid foundation. But according to Richard Wellings of the UK Institute of Economic Affairs, when it comes to Italy either a bailout package or a default is inevitable.

“I think bailout or default for Italy is almost inevitable, because the government has to borrow something like 500 billion euros by the end of 2013,” he said. “Now this is a particular problem at the moment because all the other major economies are trying to borrow huge amounts of funds from the markets at the same time. So I really can’t see any way out.”

Borrowing costs for both Italy and Spain surged, as investors rushed to rid themselves of risky bonds. Wellings argued that if either of them asks for help, the euro zone might not be able to foot the bill.

“We are looking at such huge amounts, the bailout fund can end up running into trillion of euros,” he said.

Barroso himself admitted that the debt crisis is spreading to the major Euro-zone economies. And Wellings says there are serious inflationary dangers in the medium term.

“We are seeing the European Central Bank today buying bonds,” he said. “There’s a danger of printing more money to get out of the crisis.”

Wellings believes the main problem is the failed euro experiment itself.

“This is what we are seeing in existing currency unions like the UK, where you have the South East and London subsidizing Wales and Northern Ireland, which have basically no real economy,” he said. “If we saw it on the European scale, it would be disastrous for the healthier economies in northern Europe.”

He believes the whole EU system is fundamentally flawed and eventually “parasiting” countries will have to leave the Euro zone.

“The European elite should be actually trying to work out a responsible way for the euro to break up, and for countries such as Greece to leave the Euro zone,” he said. “I think in the long run that’s the only way. Otherwise the healthier economies in northern Europe can be brought down by the whole region.”