The Euro’s Short-Lived Hurrah

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For a few heady hours Monday, financial markets wanted to believe in Italy and even Greece.

It was: out with the politicians and in with the technocrats who understand the magic levers of money and debt. By lunchtime it all turned bad again, for at least two reasons.

First, news of a sharp contraction in euro-zone September industrial output brought a crushing reminder that Europe most likely is heading into at least a mild economic recession. Deficit reduction along Europe’s Sun Belt is now doubly difficult as tax receipts dry up in a contracting economy. That international lenders will demand still more austerity measures to close the gaps is almost a given, risking turning a mild recession into potentially something graver and deepening fiscal deficits.

Take Greece, which started its fiscal belt-tightening two years before Italy. Greek data shows net tax revenue for the first nine months of this year was down 4.2% from the same period a year earlier. The overall budget deficit had widened by 15.1% over that period.

Second, ousting the temporizing political leaders who brought Italy and Greece to this pass doesn’t take the politics out of the process. The new cabinets of Italy’s Mario Monti and Luca Papademos of Greece, highly experienced European financial functionaries, will be backed by parliamentary votes of confidence later this week.

But they won’t serve as Politburos ruling by decree. They still serve at the mercy of their parliaments, which could shift support if popular resistance to still more cutbacks threatens public order and political futures. This means that political backing for austerity plans could waver at any time. So could the tentative bipartisan consensus that cleared the way for technocrats to take over government.

In Italy, there already is disagreement over the duration of the Monti administration. Backers of outgoing Prime Minister Silvio Berlusconi want a short term of only a few months, while the leading left-wing opposition party wants Mr. Monti to serve into 2013, completing the original parliamentary term.

The events of the weekend have brought only a short respite to euro-zone worries. The same political and fiscal snarls remain, framed by the notion that countries can tax and cut their way out of debt. What is sorely lacking is economic growth, and the jobs and tax streams that generates.

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