Germany Faces New Euro Challenge

Before the ink is dry on the agreement about the Greek bailout, Germany faces a new challenge to its fiscal union with the rest of Europe. In a Saturday, June 18, 2011 article in the Wall Street Journal, “Moody’s Warns Italy On Economy”, the rating company announces that it is about to downgrade the Italian credit rating from Aa2, its third highest score, to an unspecified number. It cites a weak economy and rising interest rates. Moodys says that investors don’t want to invest in highly indebted countries that aren’t growing.

But Italy, unlike Greece, is not a Balkan country. It’s not on the fringe of Europe. It isn’t threatening to leave the Euro Zone and quit the euro as its currency, the way many in Greece are. Italy’s at the very heart of Europe. It’s the origin of modern Europe, the seat of the former Roman Empire and the present seat of the Vatican. It wouldn’t drop out of the EU no matter what. And unlike hotheads in Greece, Italians are used to German jokes about them. If they could survive World War II as the only major country to be on both sides, they certainly aren’t going to be concerned about a mere fiscal crisis.

Italy presents the risk to the Germans of seeing their own currency degraded by default. But Italy would probably be their last partner in the fiscal union even if every other country fled. After all, Hitler depended upon Mussolini.