Italy’s Debt Crisis: Why Does It Matter?

Italian government bond yields soared, global stock markets freaked out and the US dollar soared in value. Just why is the growing crisis over Italy’s debt something Americans should care about?

“First and foremost,” says Jacob Kirkegaard of the Institute for International Economics, “Europe is still 25 to 30 percent of the global economy.” A crisis in Italy could spread to other parts of the European Union, and this would have a chilling impact.

Analysts are saying concerns over Italy and the euro zone led to the Dow dropping 3.2 percent at the end of trading on Wednesday to 11,781. The S&P 500 index had one of its worst day since August, falling 3.7 percent to 1,229.

Millions of American jobs depend on stability and growth in Europe. The global economy is more interconnected than ever.

“Europe is by our biggest trading partner, says Kirkegaard. “It’s where most of our exports go. It’s where we have most of our foreign direct investments. US multinational corporations are in Europe.”

Italy is Europe’s third-largest economy, and unlike Greece, Ireland or Portugal, a bailout would be vastly expensive.

The recent rise in bond yields means it costs more for Italy to raise money and pay its debts. The numbers have been rising for months. Today, for the first time since Italy joined the Euro currency zone, 10-year Italian bonds ticked to over 7 percent.

“The core underlying issue is you have too much debt in Europe,” says Kirkegaard. The threat to Italy and several other nations in southern Europe threatens the banking system, and ultimately the economy. “For the last 50 years, we have pretty much never had an industrialized country restructure its debt, so the risk of contagion is very substantial.”

Concerns about Greek debt have roiled stock markets for months, and led to predictions of a major financial crisis. Italy’s debt, at $2.6 trillion, is five times larger than what Greece owes. The bailout of Greece has been long and difficult. It’s hard to see how European leaders could bail out the Italian government. But without some kind of international rescue, Italy’s financial crisis would be damaging and potentially disastrous.

We are not there yet. Eurozone leaders may still convince Italy to act to reduce its massive deficits and debt. But with both political mess and a fiscal crisis, there is every reason to be concerned about Italy’s immediate future.