Budget stress

It was in autumn 2011: The euro crisis was getting worse and worse - and slowly spreading from smaller economies, like Greece and Portugal, to larger players, like Spain, and even Italy.

Especially controversial was Prime Minister Silvio Berlusconi of Italy, who was ridiculed for his positions and lack of action. As a result, his country's standing reached a new low. But then there was the 'great relief' of November 12 when Berlusconi stepped down. His job was taken over by Mario Monit – an economics professor, who, with his plans to get the budget back in order, won a lot of sympathy and trust, not just for Italy, but for the euro currency users as a whole.

Italy, however, remains a problem for the eurozone, says Lars Feld, economics professor at the University of Freiburg and member of the German Council of Economic Experts, which advises the government in Berlin. "With the Monti government, the country only temporarily has agreed to pursue consolidating its budget and tackling structural reform," Feld told Deutsche Welle.

Is Italy ready for change?

And in fact, many political parties in Italy have only grudgingly accepted Monti's austerity efforts. When a refom of the labor market was on the agenda, it was Berlusconi's party that withdrew its support for the technocrat government, thereby forcing the early elections the country now faces. This election is the real test of whether Italy is willing to go all the way down the path of austerity, says Feld.

It remains to be seen whether Italy will pass this test. "None of the favorites to become prime minister is counting on a breakthrough in terms of refoms," according to an analysis by Germany's Commerzbank. The front runner at the moment is Social Democrat Pier Luigi Bersani. In his campaign, however, he did not present a vision on how to solve the economic problems of his country, the analysis continues.

No time for delays

But the problems are huge and there is no time to lose. Since the introduction of the euro, unit labor costs in Italy have steadily gone up, while at the same time company competitiveness has declined. In the Global Competitiveness Index of the World Economic Forum for 2011-2012, Italy only ranks 43. The "Doing Business" report of the World Bank puts Italy even lower, at 73 – that's behind Bulgaria, or Kasachstan. In the Eurozone, only Greece is further down the list.

Together with Greece, Italy also has the highest national debt – some 130 percent of its economic output. Unemployment stands at more than 11 percent. GDP dropped for the last six quarters and this year GDP will probably fall below the level of 1999. Only Portugal is in a similarly damning situation.

What seems to work in Italy's favor, however, are its low budget deficit, fairly stable industrial sector despite the euro crisis, and the country's relatively solid banking system.

Eurozone without Italy?

What Europeans outside Italy and investors find hard to come to terms with is the resurgence of Silvio Berlusconi. The 76-year-old has even threatened that Italy might leave the eurozone should he win the vote.

But it's unlikely that it will come to that, says the Commerzbank analysis. Instead it expects the center-left camp around Bersani to win the vote and that, then, the nervousness about Italy's future will subside. A bigger concern, according to Commerzbank, is the situation Spain is in.

A blend of debt and frustration

The government in Madrid is slowly losing control over its debts. Both budget deficit and national debt are rising. In addition, there is the highly indebted private sector, while toxic debt is weighing heavily on the balance sheets of Spanish banks. The government has already borrowed some 40 billion euros from other EU countries to help it's ailing financial institutions.

So far, the stable political situation has been  viewed as a strong point in Spain's favor – especially when compared to Italy. Now, though, the tables seem to be turning. Prime Minister Mariano Rajoy  stands accused of having accepted kickbacks. He has denied the allegations and so far remains in office, but his expiration date could be drawing nearer.

In the midst of recession and corruption allegations, the country now seems to be facing the second biggest real estate bankruptcy of its history. Property giant, Reyal Urbis, has some 3.6 billion euros in debts and filed for bankruptcy this week. Since the bursting of the real estate bubble, housing prices in Spain have dropped by around 40 percent and the downward trend looks set to continue.

Cyprus waiting for a bailout

While the situation in the third and fourth largest economies is pretty bad, the third smallest country, Cyprus, is already close to bankruptcy. The island state with just 800.000 inhabitants wanted an EU bailout in 2012 and given its small size it would be much less to worry about than a country like Greece.

Yet Cyprus is a tax haven, especially for rich Russians, and so, the German government – which is up for re-election in September– does not want to create the impression that German taxpayers' money is being used to rescue the assets of wealthy Russians.

Economists disagree on whether Cyprus is big enough to need a bailout. Hans-Werner Sinn, president of the ifo institute in Munich, told DW that it would be better to let the country go bankrupt "so that investors know they can lose money, if they invest it poorly."

This is advice that politicians most likely won't follow. The fear is simply too great that the failure of one country could create a precedent and that faith in the euro, which has just been regained on the international markets, would quickly be lost again. Most experts expect that the by the end of March, Cyprus will get its bailout after all.