Economic Outlook: Scarier than Spain

Nothing was supposed to be scarier than Spain having a financial seizure, but that was when Italy's troubles seemed too far away to count.

Spain was supposed to be the straw that broke the camel's back, anyway. If Spain went into convulsions, it was going to be each country for itself.

Even that may be too dramatic for Europe where leaders have made foot-dragging an art form, given the eurozone meant frugal Germans were asked to bailout sun-bathing Greeks.

Investors are now pondering whether or not the Spanish government will need help, just as its banks did, the latter asking for a bailout of $125 billion during the weekend.

Spain's economy, no different than most of Europe, is expected to slow this year and next, and unemployment is already nearly 25 percent.

Surprisingly, the government has managed debt load well under the circumstances. Nevertheless, Spain's economy dwarfs that of Greece, which has created most of the headlines by far in the past three years.

Italy, however, has Europe's third largest economy and it is waiting in the wings. Along with 10-year bonds in Madrid, yields for Italian benchmark bonds rose Monday. In Rome, yields rose to more than 6 percent, the magic figure that causes economists to shake their heads and say, "tsk-tsk," and tag them with the "unsustainable" label.

Moreover, with former banker and Prime Minister Mario Monti at the helm, Italy is seen as a study in fiscal management. Soon after taking office, Monti guided Italy into raising both property taxes and the retirement age. In comparison to Greece, Italy embarked on an austerity strategy well before it was forced to do so. But it may have been too little, too late.

In Italy's favor, farms, cars, fashion, consumer goods -- the economy is diverse and, as The New York Times reported Tuesday, "Made in Italy" is still a viable brand.

That diversity is precisely what Italy needs. Italy's $1.95 trillion economy is predicted to shrink 1.5 percent in 2012, but return to growth in 2013, albeit growth of 0.5 percent.

Like any stock portfolio, a diverse economy has a stronger immune system than an economy based on one industry -- unless that industry happens to be oil.

In international markets Tuesday, the Nikkei 225 index in Japan slipped 1.02 percent while the Shanghai composite index in China dropped 0.7 percent. The Hang Seng index in Hong Kong shed 0.43 percent while the Sensex in India rose 1.17 percent.

The S&P/ASX 200 in Australia added 0.23 percent.

In midday trading in Europe, the FTSE 100 index in Britain rose 0.41 percent while the DAX 30 in Germany rose 0.64 percent. The CAC 40 in France gained 0.41 percent while the Stoxx Europe 600 climbed 0.46 percent.