World economy on the brink: Spain and Italy key

To a very large degree, the fate of the world's economy is now in the hands of the Spanish and Italian governments. This realization comes as the European Central Bank (ECB) has stepped in to buy debt from both countries in an effort to bring down interest rates.

BRUSSELS, BELGIUM (Catholic Online) - Last week, Italy hit a financial barrier as its interest rates continue to climb. The European Central Bank came to the rescue, and purchased a portion of that country's debt effectively bringing down interest rates. On Thursday, the ECB did the same thing for Spain.

It is becoming clear to investors and economists however, that the intervention of the ECB will not be enough to save the European economy over the long haul. Instead, significant reforms will be necessary in both countries.

Among the reforms being called for by investors are, allowing the ECB to buy trillions of dollars in troubled sovereign debt, which will reduce the borrowing costs for both countries, and for those countries to adopt significant economic reforms.

The ECB purchase of sovereign debt strongly suggests that investors are shying away from both Spanish and Italian debt as an option. With investors shying away, neither country is able to borrow money at reasonable rates which they can realistically repay. Because most countries operate over budget, they are dependent on reasonable borrowing costs to fund day-to-day operations.

The European Central Bank's decision to purchase some of the sovereign debt in those countries is a strong indicator that they are teetering on the brink.

The news for Spain is particularly bleak. With 21 percent unemployment, the country's economy is forecast to shrink for at least the first six months of 2012. However, it's believed that Spain will elect a conservative prime minister on Sunday which will oust the Socialist government. A conservative can bring hope to a country where labor unions wield broad influence. Because the Spanish conservative party is reasonably distanced from the labor unions, it will become easier for the Spanish government to adopt critical economic reforms that can help the economy grow.
The new Italian Prime Minister Mario Monti who just replaced Silvio Berlusconi, is also expected to implement sweeping economic reforms. It is an expectation -- doing less could mean ruin for that country.

And the time is right for change, as both leaders are new and will likely enjoy their greatest degree of support at the start of their administrations. This is a key time to act, particularly since some reforms will be unpopular. If either leader waits too long, economic vagaries and declining popularity could shut the window of opportunity rather quickly.

If those windows close, both economies could fail and they will find themselves beyond the reach of help. If that happens, it will send shockwaves around the world and could spark recession even in healthy economies. Given this, investors and people the world over are looking to Spain and Italy to resolve their economic problems, before time runs out.

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