The economic failures of Portugal, Ireland, Greece, and Spain have been worrisome and damaging to the Eurozone. The troubles of Spain in particular are dangerous given the size and scope of its economy, and if it does indeed collapse it will send markets reeling but may still leave a salvageable endgame. The fact that the eurozone contagion is now pushing Italy to the precipice is much more dangerous. For some time, people have been somewhat worried about the prospect of an Italian economic collapse-- Italy is the seventh largest economy in the world and the third largest in Europe. Unlike the other troubled nations, Italy is too big to be bailed out
. This is a problem as the likelihood of an Italian debt default has started to increase
over the last week, with the Italian and European markets getting jittery over Italy's debt. Italy is the third most-indebted nation in the world, and holds the most debt of the European countries.
Italy's problem is different than Greece and Spain, though, and thus much more worrisome. It is a stable, good economy with strong industries that make it a global player, from Fiat to fashion to wine. Spain's economy involved centrally-planned job growth that had a lot to do with building infrastructure that now sits completed and unused, meaning a lot of money was spent giving people temporary jobs which they now cannot replace (in addition to other contagions within Spain). So, under its heavy debt, Spain doesn't have much going for it anyways at this point. Italy, though, is much different-- investors have every reason to trust in its economy. However, the massive debt of the Italian government has spooked them off, and like dominos it will hurt everything.
Even though the European Union, various European banks, and the Italian government are rushing to spare Italy from the chaos that has engulfed nations like nearby Greece, efforts are exasperated by a lack of confidence in the market and the current state of Italian politics. Last fall I lived in Italy, and I remember a rally thousands strong in the square outside of my Florentine apartment opposing hikes in college tuition prices-- I can only imagine the number of protestors and the level of anger now. On top of that, parliamentary infighting between scandal-plagued Italian Premiere Silvio Berlusconi and Finance Minister Giulio Tremonti has jittered the markets
over concerns that the government will not be able to avert a default on their debt. Tremonti defiantly declared
after a recent meeting on Belgium, "If I fall, so falls Italy," taking a shot at Berlusconi. He followed up with the real kicker, though- "If Italy falls, so does the Euro."
The Eurozone will not be able to sustain an Italian economic collapse, and the Euro--just a few years ago talked about as a possibility for replacing the dollar as the world currency--will become toxic. France, already looking more and more endangered, will likely follow Italy in economic collapse if their southern neighbor does fall down. The mighty economy of Germany, almost single-handedly holding up the entirety of the European Union, will not be able to hold up all of this weight. This will have a ripple effect on the entire world economy, and would likely reverse any progress made in the global recession. Indeed, it will return worse off than it was before, as both the United States and China, each facing their own problems, will not be able to sustain such blows in the global marketplace. The Italian crisis needs to be watched very, very carefully, and every effort made to avert collapse there.
It is interesting to note something a French national currently studying here in Washington told me the other day. For the longest time, the United States has always pointed to Europe and said that we cannot become them, highlighting our differences and thus why we are better off. In Europe, some political commentators would sometimes point to the United States a model economic and government systems. She says that now, though, the common line in France among radio and television personalities is pointing at the United States as a warning of things to come. France is relatively stable, but starting to shows cracks that would be broken open by an Italian default. They are now looking at both our federal government and our states like California, and using us now as an example of something to avoid rather than to follow. We are toxic. We are dangerous. We cannot be emulated on this current path we are on. In watching the crisis of the Eurozone unfold, America would do well not just to see it as a potential threat to us or something that may happen to us down the road-- America must realize that it is more of a reflection of our current woes. We're still in a lot of trouble, and if we don't swallow the hard medicine regarding our government expenditures soon, then we will join Italy and France alongside Greece and Ireland far sooner than we think.