Europe:Economy Not That Bad Actually - by Elliott Gue

From the outset of the EU sovereign-debt crisis, we’ve maintained that Greece, Ireland, and Portugal’s fiscal woes would have scant effect on the EU and global economy. The three bailed-out nations’ gross domestic products (GDP) accounted for only 6% of the Eurozone’s GDP in 2010.

But Italy is a different story. With a government debt-to-GDP ratio of 119% at the end of 2010, the country faces the second-largest debt burden of the fiscally weak PIIGS (Portugal, Italy, Ireland, Greece, and Spain). To worsen matters, Italy is the EU’s third-largest economy, and last year contributed about 16.8% of the Eurozone’s overall GDP.

But fears that the Italian government will default on its debt are vastly overblown. Cynical investors have fixated on financial Armageddon rather than current conditions on the ground. Although Italy is encumbered with an elevated debt-to-GDP ratio, the government’s 2011 budget deficit amounts to about 4% of its economy. Compare that to more than 9% for the US, about 8% in Greece, and 10% in Ireland.

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