The Euro's Future Is Up to Italy -- but Can Italy Meet the Challenge?

NEW YORK (TheStreet) -- Italy and its Prime Minister Matteo Renzi are in the spotlight. Last week we found out that in the second quarter of 2014, Italy experienced a second straight quarter of negative economic growth. This means that the southern European country is experiencing its third recession since 2008.

Then on Thursday, after the meeting of the European Central Bank, president of the ECB Mario Draghi suggested that Italy needed to focus more on reforming its political and economic structure than in arguing that the ECB needed to take on an even more expansive monetary policy.

Renzi responded in an interview with the Financial Times. He agreed with  Draghi that Italy needs to make reforms, but that how the country changes is up to him and not to international bodies such as the eurozone powers, the International Monetary Fund -- or the ECB.

He also made the point, however, that he was moving in the right direction and that he would meet the rules of the eurozone for budget deficits, but that he would stick to his "chosen course."

The concern expressed last week by Draghi is an indication that there is some concern in Europe about Renzi's resolve or his ability to achieve these goals. One hopes that Renzi can accomplish his tasks. 

The battle going on in Europe is captured quite well, I believe, in a Wall Street Journal article by Simon Nixon.  Nixon argues that the battle in Europe is not about the survival of the euro, but whether or not the survival of the euro is based on terms defined by Germany or on terms defined by Italy or France or any of the other European countries on a less disciplined fiscal path than Germany.

In the most recent period, Germany has been the dominant force in setting the tone for the eurozone. Germany's approach focuses on a strong currency based upon fiscal and monetary prudence and structural reforms that create competitive economies.

Italy and France and other parts of Europe have taken a much less disciplined approach to governmental policies and market structure. And these other counties have a history of devaluations, economic stagnation and fiscal desperation.

So far, Germany has been able to steer the ship along its chosen path in spite of high emotions and name-calling. German Chancellor Angela Merkel has been firm in her low-key manner as she pushes for tight money and a strong euro.

Still, the forces on the other side of the picture continue to attack this approach, citing low economic growth, high levels of unemployment and growing social unrest. The effort to belittle Germany's effort has been substantial.

Yet things seem to be improving. Spain expanded by 0.6% in the second quarter, the fastest of any country in the eurozone. Portugal is showing much improvement despite the recent problems it has had in banking. Greece seems to be on the mend. And France seems to be moving in the right direction, although it complaining all the way.

Draghi and the ECB seem to be supportive of the more disciplined approach.

All this is why so much attention is being given to Italy. If Renzi can stick to his course and get the Italian budget under control, and if he can reform the labor markets, make Italy more business friendly and restructure the political framework, then the model for the whole eurozone will change. The eurozone could be more competitive economically, the euro could become one of the stronger currencies in the world and Europe could hold its own in world circles.

If Renzi and Italy cannot pull off this turnaround, additional pressures will be put on the ECB to enter a phase of quantitative easing, and further questions will arise over the viability of the German approach.

Let us hope that Renzi sticks to his "chosen course" and succeeds. It would be nice to have a strong Europe based on disciplined budgetary principles, prudent monetary rules and competitive business practices.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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