ITALY

Italy seems to have leapfrogged Ireland, Portugal and Spain to become the E.U. country next at risk (after Greece) in this Euro crisis.

At first blush, this is somewhat odd. True, Italy has a public debt of more than 120% of GDP. But it was over 100% long before the crisis started, is mainly held domestically, and has been serviced until recently without problems, since Italy has a high savings rate and the Government runs a primary surplus (i.e. a budget surplus before interest payments). In other words, the country is - in contrast to Greece - solvent.

However, like all European countries, Italy needs to push through reforms in order to make it more competitive, and it is here that doubts begin to surface. Italy's current problems are, at the end of the day, political, in that its E.U. partners (and others) no longer believe the Italian Government will do what is necessary. Indeed, they don't believe that the Government will do what it has already committed itself to do.

Prime Minister Silvio Berlusconi originally came to power as a successful businessman determined to inject some much needed private sector discipline into the notoriously sluggish Italian state. However, a succession of corruption trials, accusations of unsavoury behaviour and general politicking have meant that nothing has happened. Mr. Berlusconi is now widely seen as a buffoon, both inside and outside the country. More seriously, he is a class buffoon that Euro headmistress Angela Merkel no longer trusts.

There is no reason why Italy should go down the same path as Greece. However, in order to avoid the fate of its southern neighbour, it needs to ditch its current leader, and soon.  

Walter Blotscher