The Greek economy is worth a mere 3 per cent of European Union output and look at the damage its debt crisis has done to the rest of the continent.
Now imagine if the debt contagion were to infect Italy, the third largest economy in the euro zone, after Germany and France. The debt crisis would instantly transform itself into an existential crisis, with the euro's demise the likely outcome. After tallying up the bailout costs of Greece, Ireland and Portugal, there simply wouldn't be enough spare change to rescue an economy bigger than Canada's and roughly the same size as Britain's.
So what has Italy done to protect itself? Not much, really, other than to deny that it's vulnerable to the Greek disease. But clearly it's not. Italian bond yields have been rising and Moody's announced earlier this month that it may downgrade Italy's credit ratings. Italy's debt is worth 120 per cent of gross domestic product, second only to Greece's, and budget deficits, while fairly low by EU standards, persist. The Italian economy is stagnant and Italians, like Greeks, often shed their patriotism when the tax bill arrives.
This week, Italy finally got the message. On Thursday, the cabinet of Silvio Berlusconi is expected to approve by decree an austerity program, worth a hefty €47-billion ($65-billion) by 2014. It is the handiwork of finance minister Giulio Tremonti, who, to his credit, has always resisted the prime minister's desire to pump up the economy with stimulus programs that the government cannot afford. "It is the end of an era of deficit spending," Mr. Tremonti told the Financial Times. "Deficit spending is in the archives."
The spending cutbacks and tax increases are designed to reduce the budget deficit to 2.7 per in 2012, from an estimated 3.9 per cent this year, and close to balance in 2014. If it succeeds, the national debt load should reverse course. There is nothing dramatic about the plan. Retiring public servants will not be replaced, taxes on big cars will go up, a financial transactions tax may appear, and so on. Apparently the strategy is to cause the fewest negative headlines by inducing minor pain among the maximum number of people.
The fine print, however, suggests that Mr. Tremonti's contagion-blocking exercise is less ambitious than it appears. Note that it calls for cuts of only €1.8-billion this year and €5.5-billion in 2012. For an economy of Italy's size, that's a single night on the town. The deep cuts -- €20-billion in each of 2013 and 2014 -- are back-end loaded.
Guess what? Mr. Berlusconi's term ends in 2013, when he is expected to step down. That means the worst of the cutbacks are being passed on to the next government. James Walston, professor of international affairs at the American University of Rome, called the deferred cubacks the government's "poison chalice."
This, of course, is unlikely to be the end of the story. Greece still seems certain to default. Spain is in rough shape. Italy's economy is going nowhere. Don't be surprised if Mr. Tremonti is forced to shift more of the austerity program's pain into its early years.