Why is Italy now at center of Europe's debt crisis?

By Laura Smith-Spark, CNN

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Italy has found itself at the center of mounting economic concerns in recent days. Fears that it might default on its huge debt have pushed up the cost of government borrowing and led Prime Minister Silvio Berlusconi to address lawmakers in a bid to reassure the markets.

Stock markets in the United States and Europe have taken a dip amid anxiety that the kind of troubles seen elsewhere in Europe might drag Italy down, too.

So what is behind the current crisis around Europe's third largest economy? And what could it mean for Europe and the world if it escalates

Domenico Lombardi, a senior fellow at the Brookings Institution and former IMF executive board member, says the roots of Italy's troubles lie in its huge public debt and low growth rate.

Italy's economy has been growing at only 0.3%, he said, and most importantly is projected to grow at a similarly feeble rate for the next few years.

"This very low rate of growth really is one of the lowest in the world," he said, "and on top of that Italy has a very high public debt."

That debt stands at about 120% of gross domestic product (GDP) -- or in other words, a fifth more than the country's annual economic output -- and is one of the highest in the world, bar that of Greece, which has had to be bailed out by Europe.

Put these two factors together in Italy and it "becomes clear that the economy is not going to be able to generate enough resources to pay for its debt," Lombardi says.

Douglas McWilliams, chief executive of the London-based Centre for Economics and Business Research, also believes that Italy is not growing strongly enough to prevent its GDP ratio rising to unsustainable levels.

He warned in a report Thursday that Italy was "bound to default" on its debt, saying: "Greece cannot sort out its debt problem and realistically the same is the case for Italy."

Berlusconi sought to push back against such fears with an address to Parliament Wednesday in which he said the economic challenges Italy faces need "to be tackled with determination and without panic."

"We do not deny we are facing a crisis," he said, but insisted Italy's banks, institutions and political system were strong enough to cope.

"Our economy is solid," he said. "Our banks are solid. They are well capitalized. They have liquidity. They have overcome the stress tests."

But the speech was light on concrete policy measures, analysts say, and may not have been enough to deter market speculators who now have Italy in their sights.

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