You don’t need to know anything about economics to do some basic math. Here it is…lets imagine a country with debt-to-GDP of 120%. Lets also imagine that the country pays interest of 6% (that’s what Italy is currently paying; Greece is paying much more). If that’s the case, you’re paying interest that is equivalent to 7.2% of GDP. (That’s 120% x 6%.) Italy’s tax revenue is around 22% of GDP. If one-third of their tax revenue is needed to pay interest, the numbers don’t work out.The US is different from Italy only in that our debt is a little lower, and our interest rates are a lot lower. But as soon as the markets figure out that we cannot or will not reduce our spending, then our situation looks very much like Italy's. What happens when we have to pay 1/3 of our federal budget to bondholders?
So what are the long run prospects for Italy?
At a press conference after the first summit, Angela Merkel and Nicolas Sarkozy were asked whether they were reassured by Mr Berlusconi’s promises. The German and French leaders hesitated, stole a glance and smirked. The room burst into laughter. Rarely has a leader—from a founding member of the European Union, no less—been treated so disdainfully by his peers.