At first glance, it seems impossible that the fate of the world economy rests in Mario Monti's hands. The Prime Minister of Italy has the aura of a gentlemanly grandfather--the polite demeanor, the soft voice, the smiling eyes--not the tough taskmaster Italy so desperately needs to escape its dangerous and protracted debt crisis. Monti, 68, speaks in the long, precise, jargon-laden sentences of an academic economist, which he was only four months ago. He does not employ the rousing rhetoric of a typical politician. He seems like the sort who'd get chewed up by Italy's political machine, not reform it.
Listen to what he says, though, and the real Monti emerges. His words are edged with steel. He talks not merely of ending Italy's economic crisis but also of pursuing a sweeping agenda to set free the energies of a moribund economy, fixing a deadlocked democracy and charging forward with greater European integration. Listen carefully and you realize Monti is not hoping for quick fixes. He's aiming at nothing less than a wholesale overhaul of Italian society. As he recently told TIME during an interview in the Prime Minister's stately office in Rome, "I believe that reforms will not really take hold if they do not gradually come into the culture of the people."
Monti's mission matters to everybody--from Wall Street financiers to Chinese factory workers. That's because Italy's problems have become the world's problems, and Monti must fix Italy to prevent another global financial crisis. His most pressing issue is the precarious state of Italy's national finances, including a mountain of government debt equivalent to more than 120% of GDP--the second highest level in the euro zone, after that of troubled Greece.
But Italy's difficulties run even deeper. From 2000 to 2007, Italy's GDP grew at an average annual rate of 1.5%, compared with nearly 2.2% for the euro zone overall. Though Italy's economic woes are nothing new, when the contagion from the European debt crisis struck, it focused investors on Italy's enfeebled condition. In mid-2011, they began fleeing Italian government bonds, sending 10-year yields past 7%--a level that would eventually become too expensive to bear. The terrifying possibility emerged that Italy--the euro zone's third largest economy--could default or require a large-scale bailout.
And as Italy goes, so goes the euro. Italy looms as the biggest threat to the embattled currency's survival, because Italy is paradoxically both too big to fail and too big to save. While Europe rescued Greece, Ireland and Portugal, a bailout of Italy would require such huge sums--by one estimate, $900 billion--that its neighbors, including giant Germany, would likely be unable, financially or politically, to ante up the cash. Yet if Italy tumbles into insolvency, it could set off a chain of events that unravels the monetary union and puts Europe's even grander half-century experiment in democratic integration in peril.
The consequences of an Italian default--and even worse, a collapse of the euro--are almost unimaginable. Shock waves would ripple through global financial markets to every corner of the world, sinking banks and economies along the way. The fates of Monti, Europe and the worldwide recovery have thus become inexorably entwined.
The Full Monti