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Dispatch: First Greece, Now Italy

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Video Transcript: 

Vice President of Analysis Peter Zeihan explains how Italian debt has become the greatest threat to the eurozone.

Editor’s Note: Transcripts are generated using speech-recognition technology. Therefore, STRATFOR cannot guarantee their complete accuracy.

The Italian government eked out a legislative victory today, but the victory was a hollow one. Only 308 of the parliament’s 630 MPs voted for the government’s budget, eight shy of a majority. The bill only passed because the opposition chose to abstain rather than defeat the budget. Italy has now taken the lead position in the contest of what can unravel the euro.

Greece, which has held that dubious honor for nearly two years, is actually now off the radar. Today the Greeks formed a national unity government that has the political authority to implement deep austerity while compartmentalizing political backlash against the system. It might not work, but it should last at least until the new year.

But today’s Italian budget vote — or more specifically the decision of several previously pro-Berlusconi deputies to abstain with the opposition — puts Italy squarely in the crosshairs.

Italy, like Greece, faces an insurmountable debt mountain. Italy, like Greece, has problems with political unity. But Italy, unlike Greece, has a leader who refuses to step aside in favor of a national unity government. Berlusconi has been at or near the top of the Italian political scene for a generation, and his People of Freedom party is his own personal political machine.

Berlusconi now has seven days to repair that machine. If he cannot muster an additional eight votes by Nov. 15, his government will fall in a scheduled confidence vote. That would push Italy into an election at a time when markets are waking up to the fact that it is not Ireland or Spain or even Greece that is the biggest threat to the eurozone. It is Italy.

Even in the worst-case scenario Greece only has about 350 billion euro of debt outstanding, most of which now is held either internally or by the European Central Bank. Italy has nearly 2 trillion euro in outstanding debt. An Italian credit cutoff would trigger a financial meltdown across Europe that would both be immediate and catastrophic.

Avoiding that would require a new Italian government without going through one of Italy’s famously destabilizing elections. In the aftermath of today’s budget vote, Berlusconi claims that he will resign after a series of austerity laws are adopted, ushering in a new unity government. Votes on those laws, however, are scheduled to be held after the confidence vote, so it's not clear whether this is truly turning the page or simply stalling for time.

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