As the economist Mario Monti’s new government takes office in Italy, much is at stake – for the country, for Europe, and for the global economy. If reforms falter, public finances collapse, and anemic growth persists, Italy’s commitment to the euro will diminish as the perceived costs of membership come to outweigh the benefits. And Italy’s defection from the common currency – unlike that of smaller countries, like Greece – would threaten the eurozone to the core.
Italy is a large economy, with annual GDP of more than $2 trillion. Its public debt is 120% of GDP, or roughly $2.4 trillion, which does not include the liabilities of a pension system in need of significant adjustments to reflect an aging population and increased longevity. As a result, Italy has become the world’s third-largest sovereign-debt market.
But rising interest rates are causing the debt-service burden to become onerous and politically unsustainable. Furthermore, Italy must refinance €275 billion ($372 billion) of its debt in the next six months, while investors, seeking to reduce their financial exposure to the country, are driving the yield on Italian ten-year bonds to prohibitively high levels – currently above 7%.