Italy’s Next

The lead article in today’s New York Times, “Euro Fears Spread to Italy as the Debt Crisis Deepens,” represents a realization of the worst scenario for Euro zone countries and can be described in one word, “contagion.”

In this scenario, the problems in Greece start to have ramifications in other countries, potentially Spain and Portugal, and the ultimate nightmare, Italy. Contagion to Italy is a nightmare because it is the Euro zone’s third largest economy and is too large to either fail or bail out. Failure would lead to a worldwide financial crisis and the possible complete collapse of the Euro. Bailout is just impossible in terms of raising the necessary capital.

The Europeans did create a special bailout fund in the European Financial Stability Facility, but they have been unable to raise even the initial goal of $1.4 trillion. Meanwhile, as Euro zone members huddle to react to this recent run on Italy, the non-Euro zone countries in the European Union warn about taking any steps to change the treaty to their detriment.

What you have, then, is a two-speed Europe, one for the countries using the Euro and one for those who are not. The President of the European Commission, Jose Barroso, called for a rectification of this division by having all countries in the European Union adopt the Euro, but many regard this possibility as utopian.