But for all the wailing and gnashing of teeth about the country’s finances, even Spain is a relatively minor problem if tackled correctly. At 69%, Spain’s current debt load as a percentage of GDP is actually lower than that of Germany, France or the United Kingdom. And even if the planned bank bailout from earlier this month adds another $100 billion, total indebtedness will be roughly in line with these Western European peers.
Should Spain need a full sovereign bailout due to its short-term funding needs — and it is looking increasingly likely that it will — a Spanish bailout would be affordable under the existing bailout mechanisms in place. Unless Europe’s leaders are even more inept than the most cynical of us could imagine, it won’t be Spain that derails the European project.
No, the real crisis that will eventually determine the fate of the European Union is not Spain, and it’s certainly not Greece. It’s Italy.
With a GDP of $2.2 trillion, Italy is the eighth-largest economy in the world, slightly smaller than Brazil but larger than Russia, Canada or India. But the Italian government bond market is the third-largest in the world, after only the United States and Japan.
Italy’s outstanding government debt amounts to 120% of GDP, making Italy the most indebted of all industrialized countries save Japan or Greece. When it comes to spending money they don’t have, it would seem that Italy’s politicians can compete with the best in the world. And given Italy’s lackluster growth rates of the past two decades, the country’s ability to pay those debts should be called into question.
Spain and Italy are on odd sort of mirror image. Before the crisis, Spain’s government was considered to be a model of responsibility, and its government debt load was among the lowest in Western Europe. Spain’s current predicament was not brought on by government spending run amok but by a real estate bubble and bust that wrecked the country’s large banking sector. In Italy’s case, the private sector is fine. The country’s banks are, for the most part, in decent health and conservatively financed. It is wanton government spending that called Italy’s credibility into question.
The issue of timing also is very different. Spain’s short-term outlook is desperate; the country is struggling to close a yawning budget deficit without killing an economy that is already on life support, but its longer-term outlook is not particularly bad. In Italy’s case, it is the short-term picture that isn’t particularly bad. Excluding debt service, the country’s current budget is close to being balanced, and its immediate borrowing needs are modest. But without growth, Italy’s debts become harder and harder to pay.
But while we have two very different countries with two very different sets of problems, we have one crisis — a crisis of confidence.