What’s going on in Europe can be confusing and can leave Australians wondering why on earth it matters to us. After spending 3 days in Italy learning more about what’s happening on the ground, you start to get a sense of the financial drama which is unfolding.

Despite the political turmoil of the last week which saw Italy Prime Minister deposed and replaced by an unelected economist with all the right credentials, yields on Italian 10-year Government bonds rose above 7 per cent again last night.

Now 7 per cent was the magic number which saw Greece, Portugal and Ireland ask the European Union for a financial bailout.

What’s worrying the financial markets is that Italy is just too big to rescue.

I know it’s confusing so I’ve jotted down some dot points on what’s going on in Italy.

GLOBAL FINANCIAL CRISIS

. Mark 1… US banks hit by defaulting home loans

. Mark 2… European countries living beyond their means

WHAT’S WRONG WITH ITALY

. 8^th largest economy in world

. 4^th largest economy in Europe

. debts of $2.6 trillion… 120% of economy

. French banks have $400 billion exposure, German banks $150b

. European Stability Fund is $1.3 trillion.. not enough to save Italy.

. Nightmare to do business...(ranked 87th Ease of doing business behind the Sudan)

. Lot of corruption... (ranked 67th in Corruption perception Index behind Rwanda and several other African countries)

. Economy not growing (over last 10 years economic growth has gone backward... ranked 179th in world behind Zimbabwe)

ITALIAN AUSTERITY MEASURES

. Public servant wage freeze until 2014

. slash pubic service… for every 5 people who leave they’ll only be replaced by one

. delay severance pay for senior positions

. lift statutory retirement age for women from 60 to 65

. tougher pension elegibility rules

. freezing indexation of pensions

. increase health care fees

. increase VAT from 20-21%

. cut family tax benefits

. tax on financial assets

. 3% tax surcharge on incomes over E300,000

. limit cash transactions to under E2,500

. crackdown on black economy

. crackdown on tax evasion

. cut Government red tape

. deregulation of labour laws

. privatising government enterprise

WHAT WILL SAVE ITALY

. government debt high but private debt low

. makes a budget surplus before interest... debt is the killer

. has a strong industrial base

. Italians are good savers

WHY SHOULD AUSTRALIANS CARE IF EURO ZONE COLLAPSES

1. Collapse in commodity prices as global economy slows… demand for our commodities stops
2. Global banking system stalls… credit squeese and credit costs rise which pushes up interest rates.
3. Consumer and business confidence hit
4. Sharemarkets fall which affect superannuation fund returns