Troubled Italy Calls Out Troubled Spain

Italy’s Prime Minister Mario Monti said Spain may be the next flash point in the eurozone sovereign debt crisis, according to Bloomberg. Apparently he has forgotten that global capital markets investors sold down the paper of his own nation just a few months ago and that his own economy and deficit problems are still in the woods. Monti’s statements may come back to trouble him.

It is odd that the leader of one nation in the eurozone — unless that nation is Germany or France — would make a public statement about the financial situation of another. One cause of the debt crisis in Europe has been the spread of worry, which has not always been based on hard fact. Monti’s comments are another example of that, as well as another reason for institutional investors to be concerned about the prospects of the region’s debt.

Spain’s immediate problems are worse that Italy’s. Unemployment is higher than 20%. The economy has entered a period of contraction. The central government has struggled to put austerity measures into place. These struggles, taken together, may force the country to turn to its neighbors for help. But the pool of funds set up to act as “firewall” probably are adequate for the task. That pool is currently 500 billion euros, and it likely will grow. The expansion recently was supported by long-time holdout Angela Merkel of Germany.

Italy has faced labor opposition to its own austerity plans, which will be a hurdle for Monti. Italy’s unemployment rate is well above 9%. That is much less than Spain’s, obviously, but not high enough to support the growth of its economy. Italy’s GDP contracted by 0.7% in the fourth quarter of last year. Some experts believe Italy will fall into its fifth recession since 2001. The cumulative effects of all that contraction will make the construction of a foundation for stable growth all the more difficult.

Monti should look to his own country’s problems, as well as attempts at solutions, rather than worry about trouble with his neighbors.

Douglas A. McIntyre