The situation in Italy shows how a burgeoning crisis unfolds. Weakness in one area portends to weakness in others; furthermore the weakness in one area also weakens others. The Italian federal government’s budget woes are well-known. What is less well-known is that the federal government subsidizes its provinces just like our federal government subsidizes the states with education, medical and highway payments among others.
When Italy began slashing the budget, one of the first line items to be reduced was payments to the provinces. The provinces are now running out of cash. This is also happening in Spain and will grow worse in both countries as the recession deepens.