Prime Minister Mario Monti of Italy, left, shown last month in Rome, has been one of the euro zone’s loudest opponents of the austerity advocated by northern-tier countries like Germany.
By LIZ ALDERMAN and ELISABETTA POVOLEDO
VENICE — As Spain became the fourth euro zone country to accept an international bailout, investors turned their nervous gaze Monday to Italy, selling Italian stocks and bonds on worries that Rome could be the next victim of Europe’s financial infection.
Italian officials are now privately expressing concern that even a €100 billion, or $125 billion, bailout for Spanish banks may not stop the troubles from spreading.
“It seems likely that the risk of contagion to Italy may become real, especially if the situation worsens in Spain and Greece,” said one official who spoke anonymously, citing the sensitivity of the situation. “It’s very worrisome.”
Even the Italian prime minister, Mario Monti, the vaunted European technocrat who came to office in an emergency after the euro crisis forced out Silvio Berlusconi last November, has begun to acknowledge the dangers posed to his country’s too-big-to-fail €1.56 trillion, or $1.95 trillion, economy. The big fear is that Italy cannot grow its way out of a recession fast enough to pay a mountainous national debt.
“There is a permanent risk of contagion,” Mr. Monti told an economics conference near Venice over the weekend, speaking by telephone. “That is why strengthening the euro zone is of collective interest.”
Investor euphoria over the Spanish bailout deal Monday morning was short-lived, giving way to an essentially flat day on many European stock markets. But Italy’s benchmark index was the Continent’s worst performer, ending down 2.8 percent.
Italian 10-year government bonds dropped in value for a fourth straight trading session. The yield — a measure of the government’s borrowing costs and of investors’ perception of risk — climbed 0.26 percentage point Monday to just over 6 percent, and at one point reached 6.03 percent, the highest level since January.
“There’s no doubt contagion will come to Italy,” Daniele Sottile, a managing partner at the financial advisors Vitale & Associati in Milan, said at the same conference that Mr. Monti addressed. “It’s proof that the European mechanisms designed to stop the crisis are not working.”
Sergio Marchionne, the chief executive of Fiat and Chrysler, was more blunt at the conference, which was convened by the Council for the United States and Italy on an island near Venice. “Somebody better do something before we get to the point of no return,” he said.
Mr. Monti, a former European commissioner for internal markets and for competition, has a reputation as a savvy leader trusted by international officials. But he faces a host of problems at home.
The pressing issues include the fact that Italy, with the third-largest European economy, after those of Germany and France, will have to shoulder a large portion of the bailout bill, even as Rome grapples with its own sharp economic downturn.
Because Italy does not have enough economic growth to generate the money itself, the government will have to borrow it at high interest rates, adding to an already heaving debt load.
Few question Mr. Monti’s competence: Within the first six weeks of coming to power, he managed to pass more economic measures than Italy had seen in a decade, including increasing the retirement age, raising property taxes, simplifying the operation of government agencies and going after tax evaders. And still pending is his legislative slate of economic changes meant to revitalize growth, including an effort to overhaul Italy’s notoriously inflexible labor rules.
But his government is also shackled by the legacy of decades of political unwillingness to make painful changes.
As a result, “market attention looks set to shift to Italy,” Commerzbank analysts wrote Monday in a note to clients. Combined with weak growth, they said, the difficulties Mr. Monti faces in getting lawmakers to implement economic change means “it may be just a matter of time before Italy also seeks help.”
In fact, Mr. Monti faces daunting, perhaps insurmountable, obstacles embedded in the very fabric of Italian politics and society.
As he fields frequent euro crisis phone calls from President Barack Obama and Chancellor Angela Merkel, he is under mounting criticism within his own country. Italy’s dominant political parties, the center-right People of Liberty and the center-left Democratic Party, are participating in Mr. Monti’s government, but are terrified of being too closely associated with the tough measures he has already put in place and the others he is still pushing for. Some opposition parties have been pressing for new elections to be held before Mr. Monti’s term ends in 2013.
And so it has become a political paradox for Mr. Monti’s government: Even as he has been one of the euro zone’s loudest opponents of the economic austerity long advocated by northern-tier countries like Germany, his opponents at home attack his domestic economic proposals as too austere.
Since he came to power, the Italian economy — like most of Europe’s — has grown weaker, expected to contract 1.5 percent this year and increase just 0.5 percent in 2013. Italian banks have sharply curtailed lending, pushing thousands of small and midsize Italian businesses into bankruptcy.
The country’s unemployment rate has rapidly marched above 10 percent, well above Germany’s 5.4 percent, according to Eurostat, the European Union’s statistical agency.
The government debt, already at 120 percent of gross domestic product, will almost certainly continue to rise, especially if Italy must foot a larger portion of the bill for shoring up the monetary union. Beyond the bailout of Spain, few can predict how things will play out for the region, if Greece takes a step toward the euro zone exit in next weekend’s elections.
In many respects Italy is still better off than Spain and the three other bailout recipients — Greece, Ireland and Portugal. The current annual budget deficit has shrunk to 2.8 percent of G.D.P., which is down from 4.2 percent a year earlier and below the 3 percent level required by the euro union’s membership rules.
It has Europe’s second-largest manufacturing and industrial base, after Germany’s, and is one of the biggest export-oriented economies in the euro zone. “Made in Italy” is still a brand asset the world over, led by icons like Ferrari cars, Gucci handbags and Ducati motorcycles. The country is also filled with state-owned assets like power companies and the national postal service that could bring in billions of euros should the government manage to privatize them to raise money.
Despite recent downgrades by the ratings agency Moody’s Investors Service, Italian banks are relatively sound — at least compared with Spain’s — because they are not saddled with bad debts from a real estate bubble. And even though the Italian government issues more bonds than any other euro zone country, the Italian public owns about half that debt, meaning the banks are less vulnerable to fluctuations in the bonds’ value than banks in Spain, which are heavily invested in their government’s risky bonds.
Even so, deposits have been fleeing Italian banks for havens in Switzerland, according to several bankers at the weekend conference, on concern that Mr. Monti will raise taxes for the wealthy and as a hedge if the euro zone economy takes a turn for the worst.
Contagion is as much about fear as economic fundamentals, which is why if Mr. Monti cannot muster the political backing soon to push through his changes, there is a widespread assumption that the crisis will quickly breach Italy’s borders.
“Monti has a good agenda, and has clear in his mind what should be done for Italy,” said Cinzia Alcidi, a research fellow at the Center for European Policy Studies in Brussels. But his approach is that of a technocrat, “and when it is confronted with political and social reality, that makes things more difficult.”
Ferruccio de Bortoli, the editor of the Corriere della Sera newspaper, said Mr. Monti would have a tough time getting changes implemented by a caste of civil servants who were installed in key government positions long before he got there, and will remain long after he leaves. Many of these officials are out to protect their own fiefs and privileges, Mr. de Bortoli said.
Across Italy’s political spectrum, support for Mr. Monti has been tepid at best. But many observers agree that any attempt to hold early elections would be disastrous, blocking Mr. Monti’s efforts at change and thrusting Italy back into political mayhem. It is unlikely that any other party or coalition would receive enough support to govern comfortably.
“The good news” said Sergio Fabbrini, director of the school of government at Luiss Guido Carli University in Rome, is that Italy has veered away from becoming a “failed state in Europe” because of Mr. Monti.
The bad news, he said, is that Italy’s embedded politicians have still not acknowledged the reasons for Italy’s problems. “And when the quality of the political elite is as low as it is in Italy, or in Greece, it is difficult to create the structural conditions for growth.”
Elisabetta Povoledo reported from Rome.
This article has been revised to reflect the following correction: Correction: June 11, 2012 An earlier version of this article misstated the size of the Italian economy. Its gross domestic product is roughly $2 trillion (€1.6 trillion) a year, not €2 trillion.A version of this article appeared in print on June 12, 2012, in The International Herald Tribune.
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