By Brian Cronin

The thing about beating a dead horse is that the poor animal can’t feel anything anymore but it does give the one with the stick continuing pleasure. So at the risk of being accused of animal cruelty, let me return, like a dog to an old bone, to my particular dead horse: Europe.

Last week I took a look at Spain and the mess that it is in. This week I want to look at Italy. Spain is the fourth largest economy in Europe, but Italy is the third and potentially a bigger problem. It is not in the same boat as the others along the Mediterranean but different doesn’t mean immune from difficulty.

Italian prime minister Mario Monti opined early last week that Europe was in danger of a psychological breakup because of the north-south divide. Growing resentment between nations was slowly destroying the European idea, he said. The tension between the still-haves and the hads-who-already-overspent is growing. Sr. Monti also made a dig at Germany’s aloofness and hard-headed attitude.

It was the duty of national leaders, he said, to explain clearly to their citizens what was going on and not to give in to prejudice and easy caricature. Not that easy however: the offices of the troika bankers in Athens have been dubbed Gestapo headquarters and Chancellor Merkel has been accused of wanting to set up a Fourth Reich. Not really very subtle.

Il Giornale, a newspaper owned by the brother of former PM Silvio Berlusconi, published a picture, taken at an unfortunate moment, or maybe deliberately, of Merkel with her hand raised and dubbed it a Nazi salute. The accompanying article attacked her saying that her intransigence had brought Italy and Europe to its knees: “Italy is no longer in Europe but in the Fourth Reich”. German politicians have reacted angrily as you might expect.

Il Giornale has regularly accused PM Monti of being another Neville Chamberlain, appeasing the Germans and not doing enough to stand up to them. Historians out there will recall that Chamberlain was the British prime minister who came back from Munich in 1938, waving the piece of paper with Hitler’s signature on it, saying it guaranteed “peace for our time”. Hitler’s attitude, apparently, was that Chamberlain was a kindly old man and he thought it would be nice to give him his autograph.

Berlusconi himself has been known offer insults freely, albeit with a smile, and has been accused of calling Angela Merkel “culona”, which my dictionary of international slang translates as “lard-ass” or “fat-ass”. Not very nice!

So it’s not all sweetness and light in the European paradise and certainly not very high minded, nor adding to the tone of the discussion. But when you feel your destiny is being dictated by outside forces, and beyond your control, gnawing away at you, tempers are bound to flare up. Sr. Monti’s popularity has fallen dramatically from around 70% to 35% as the cutbacks, tax increases and sacrifices have not produced an appreciable difference to an economy in recession. He’s dancing as fast as he can though and the courtly Monti is currently seen as the better choice for Italians than the very flamboyant, over-indulgent, gaffe-prone Berlusconi.

Sr. Monti has said he wants moral support from Berlin and has increasingly taken a harder line with Berlin asking for more flexibility. Ignazio Visco, the head of the Banca d’Italia, said that Italy did not yet need a bailout – note the word ‘yet’ – but didn’t exclude the possibility in the future. It has so far not taken any money from anybody. The danger is that once market operators perceive their optimism for a eurozone solution is misplaced, that they will go after the weakest link, currently Spain with Italy not far behind. Bodies in the water and sharks everywhere.

As of this writing, the spread of the Italian 10 year bond over the corresponding German bund is about 425 basis points. While Italians might feel that that is excessive and unfair and doesn’t deserve to be that high, it is what it is. Once borrowing rates reach the 7.00% level, deemed by all as unsustainable, then it creates considerable difficulty for the Italian treasury and the fear is that it could complicate matters for the government, maybe even precipitating an early election. Who could take Monti’s place is problematical however.

So how did Italy get into this present state of affairs? Like Spain, Italy was, until the emergence of Garibaldi and national unification in 1870, a collection of small kingdoms and principalities. The experiment with fascism and Mussolini ended in 1943 as Italy surrendered to the Allies. He lasted until 1945 when he was summarily executed. A series of more than sixty revolving door governments after the war made Italy a laughing stock among European nations. With the Treaty of Rome in 1957 and the economic growth that ensued, Italy burnished its image despite patronage politics and hidebound labor practices.

With the global financial meltdown in 2008-2009, the economy took a big hit and over the last two years growth has been exacerbated by rising debt which now stands at around 120% of GDP. 16% of the country’s revenues is spent servicing that debt. The fear of course, is that could go much higher. The country is now in recession. All this turmoil brought down the flamboyant Sr. Berlusconi and Sr. Monti is now the man charged with making things right.

Italy is a collection of separate interests and cultures and has been at pains to mold itself into a cohesive whole as much for itself as for the outside world. The industrial north is as different from the rural south as both are from Sicily, which has had its own struggles recently with lopsided debt-incomes ratios until Rome bailed them out. So though Italians grumble about the status quo, there doesn’t seem to be much impetus for change and vested interests are intent on preserving that stasis.

But Italy is not the basket case that the other southern Europeans are. Italians save money and pay their taxes (after a fashion) whereas Greeks do neither. Italian debt is not held by the international community but by Italians themselves and that’s a big difference.

Meanwhile, Otmar Issing, the former chief economist of the Deutsche Bundesbank, opined that some nations may be forced out of the euro though it would be in Germany’s interest to stay in. Luxembourg’s Jean-Claude Juncker, the head of the eurozone’s finance ministers, said that a Greek exit from the euro would be manageable, though not desirable.

So now the cracks are starting to appear and what was previously unthinkable is now being thought. The crisis is not going away. The problem is getting bigger and will require bigger solutions if it is to survive in its current form.

As Chief Brody said in “Jaws” (1975) when he saw “Bruce” the shark for the first time: “you’re gonna need a bigger boat”!.