FinancialEdge: How Did Italy Get To This Point?

As the eurozone crisis grinds on into another year, the only substantive change is the name at the center of the storm. Worries about Ireland have largely subsided for the time being, but the situation in Greece is still parlous at best. Now the spotlight is on Italy; amidst a change in government, ongoing wrangling with France and Germany and coordination between multiple central banks, the worry now is whether commercial banks, insurers and investors will have to factor in the risk of a default in yet another country. (For more, check out How Countries Deal With Debt.)



What went so wrong for Italy that the country and its citizens find themselves in this situation? And perhaps more to the point, what can be done to fix matters?

The State of Things
At the risk of oversimplification, Italy is the latest European country to find itself no longer in position of the benefit of the doubt when it comes to its solvency and liquidity. Italy actually has a relatively positive primary budget, but according to the Central Intelligence Agency World Factbook the country has a large public debt – totaling some 120% of GDP or 1.9 trillion euros.

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http://financialedge.investopedia.com/financial-edge/1211/How-Did-Italy-Get-To-This-Point.aspx#axzz1gFWhcqZM

FinancialEdge - Disbanding The Euro - A Worst-Case Scenario

Although the title of this column mentions the worst-case scenarios for the collapse of the Euro, that is not quite what it is about. Instead, it is more about the probable negative outcomes should the Euro go away. If I was to talk about true "worst case scenarios", I'd have to talk about the risk of virtual economic collapse in Southern Europe, competitive devaluations throughout Europe, the risk of less-democratic governments in some areas of Europe, and, ultimately, the outbreak of war as political demagogues pander to financially desperate populations and rile them up with notions that other people/countries are responsible for their problems and must be punished. 

Only time will tell if we are past the worst of the debt crisis in Europe, or simply enjoying a calm amidst the storm. In either case, the crisis in Greece and the fears of its spread into Spain, Italy and Portugal have led many financial analysts and commentators to seriously consider what had once been mostly the domain of crackpots - the notion that the euro could collapse and vanish altogether.

This is no small matter. Of the 10 largest economies in the world, four use the euro as their currency. Roughly 330 million Europeans use the euro every day, while nearly 200 million people use currencies that are pegged to the euro (many of them in Africa). It is also the second most-used currency as a reserve currency, with roughly one-quarter of the world's reserves held in euros. 

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http://financialedge.investopedia.com/financial-edge/0610/Disbanding-The-Euro---A-Worst-Case-Scenario.aspx