For the past few months, European leadership and the markets have been focused on Spain, Italy is the euro zone?s real problem.
Italy?s GDP has dropped seven tenths of a point during Q2 2012, marking four consecutive quarters of negative growth during which its economy has contracted 2.5%. This is a point and a half more than Spain.
Besides these weak figures, Italy will face 324.725 billion euros in debt repayments between now and December 2013. In comparison, Spain only has to pay 157.896 during the same time frame. With these figures in mind, the EU thinks that it?s impossible to carry out a traditional bailout as they did with Greece.
Because of the disproportionate size of their collective debt burden, the Bundesbank won?t allow the European Stability Mechanism to buy Spanish and Italian debt on the primary debt market, thereby slowing down aid destined for Spain. The situation demands a quick solution for the next several months in order to reinvigorate the third and fourth largest euro zone economies. They have already weighed down Germany?s economy in terms of manufacturing and exports.
Time is running out for Merkel and her cabinet to convince Germany?s central bank that the best solution is to create a bailout in which the European Stability Mechanism and the European Central Bank both channel aid to Spain and Italy. Only thus can we prevent some countries abandoning the euro. A passive approach will only lead to disaster.