Europe's Debt Crisis: Five Threats to the Common Currency

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Italy: Overlooking the Debt Mountain

The risk premium on Italian government bonds has increased significantly in recent weeks. Its 10-year bond stands a good one percentage point higher than its German equivalent -- and at first glance, that is not surprising. After all, Italy's total public debt is sky high: According to government estimates, it stands at more than 100 percent of GDP.

That, though, has been the case since 2006, long before the outbreak of the crisis. Economists are giving Italy the all-clear for now, saying it does not face the same short-term risk as Greece and others. Nor does Italy have the same crisis symptoms as the more economically fragile European countries.

Unlike Spain, Italy's economy has not been shaken to its foundations by the bursting of a housing bubble. Unlike Greece, its government does not tinker with its own budget deficit figures. Unlike Ireland, its financial sector has not been badly affected by the crisis: The Italian banking oversight system has long been relatively strict, even before the Lehman Brothers crash.

In addition, it is seen as unlikely that Italian public spending will significantly increase in the foreseeable future. On the contrary, the government pushed an austerity package through parliament in July 2008. Nevertheless, a national debt of more than 100 percent of GDP remains a huge risk factor. And Italy's current budget deficit of 5.3 percent of GDP may be well below that of other crisis-struck countries, but it still lies well above the stability pact limit of 3 percent. "Government spending continues to gallop," criticized the Milan economist Tito Boeri last week. And the Italian government shows no sign of trying to change the situation any time soon.

The rating agency Fitch recently criticized Italy, saying it has indefinitely postponed almost all its measures to slim down its debt. As a result, it is no big surprise that capital markets are lumping Italy together with high-risk euro zone countries such as Greece and Portugal.

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