Italian designers

The U.S. economy is taking tentative steps forward, but by almost any definition Europe is still a mess. The Greek drama may yet reach a satisfactory denouement, via bailouts and austerity measures. But Italy-Europe's third-largest economy-has upstaged Greece. Italy's crisis began when rates on 10-year bonds rose past 7 percent in early November. That is 5 percent higher than German bonds and reflects the riskiness of Italian debt. According to Rusty Leonard of Stewardship Partners, "At these levels, Italy is not able to finance itself. Similar rates triggered the bailouts of Greece, Ireland, and Portugal."

With debt approaching $3 trillion (₣1.9 trillion), Italy is too big to rescue, a fact captured in an increasingly repeated sound-bite: "Too big to fail and too big to bail." Much of this debt is already owned by banks and other financial institutions around the world. So if Italy can't make payments on its debt, a global cash-flow crisis would follow-affecting thousands of banks and the millions of corporations and individuals who do business with them.

The only good news is that the crisis provides a near-textbook opportunity to compare free-market ideas to socialist ideas. Germany, France, and England-Europe's other economic powerhouses-have made free-market reforms and imposed spending cuts. As a result, they are faring better. Countries such as Italy, Greece, and Spain still struggle under Keynesian and neo-socialist ideas of centralized planning and deficit spending.

In fact, Mario Draghi, the head of the European Central Bank, said in November that "external forces"-such as the debt purchasing activities of the European Central Bank itself-can't solve the problems in Greece and Italy. That remarkable admission was bureaucrat-ese for: What a country sows, it also eventually must reap. Pretty basic, but some European leaders apparently missed Sunday school that day, making Draghi's assertion, however obvious, a victory of reality over ideology.

Italy appears to be learning this lesson-the hard way. The profligate and corrupt Silvio Berlusconi resigned as prime minister after austerity measures passed the parliament on Nov. 12. Mario Monti, by all accounts a quiet and competent technocrat, took the reins. But he will have much to fix. Italy's corruption was not confined to Berlusconi. Thousands of senior government officials have lavish perquisites, and tax evasion is not only common, but almost expected.

Monti, on the other hand, walks the streets of Rome without bodyguards, drives himself when he can't walk, and carries his own bags-common man touches that are generating good will. As the demands of the job increase-and the dangers he will encounter as he engages the essential task of fighting corruption-this modest style might of necessity change, but insiders and outsiders say he has struck the right opening chord.

So if the old saying that "whatever doesn't kill us makes us stronger" is true, we might look back on this era of financial brinksmanship as one in which Europe came to its senses. That is, if Monti can survive, politically and otherwise. Two millennia ago, Rome gave inspiration for democracy. More recently, however, it gave us the treachery of the Borgias. These worldviews are in conflict for the soul of Italy today-and perhaps the European economy.