The Swift Rise of Italy's Problems

The most astonishing thing about the disintegration of Italy’s financial situation is that its problems were barely mentioned a month ago. The focus was on Greece, Portugal, Spain and even Ireland. Most regional policy makers, economists and politicians viewed Italy as safe, even from contagion. The only real threat to Italian Prime Minister Silvio Berlusconi then was a sex scandal. Now he may be pushed out of office over the debate about how much Italy will have to cuts its budget. The whole matter shows how fluid and unpredictable the sovereign debt crisis is and why the situation poses such danger to the international financial markets.

The fact that Italy has $2.6 billion in debt is no surprise. What caught the markets flat-footed is how fast the overall Italian economy disintegrated. That was probably the result of weakened national economies around the rest of the eurozone reducing the demand for Italian goods and services. Suddenly an economy that was supposed to grow at 3% is expected to do much worse. That has driven the country’s cost to issue debt to unsustainable levels.

The spread of economic trouble from one nation to the other is not entirely due to slowdowns in economic activity. It is much more likely that the crisis in Greece has prompted experts and investors to look more closely at the balance sheets of other nations in the region. On close inspection, a number of problems are evident beyond Greece, as are the unreliability of forecasts. Even France has fallen victim to this trend. The second largest economy in the eurozone was supposedly so robust that the country stood alongside Germany as a financial savior of the region.

Italy’s economy has been very poor since the recession began. Nothing suddenly changed that. What changed is that experts began to fear what they saw when Italy became the next economy put under the microscope.

Douglas A. McIntyre