Nobel-winning Columbia professor Robert Mundell, considered the "father of the euro," said in an interview this week that Greece isn't Europe's biggest problem these days. He believes that honor goes to Italy.
Mundell warned that Italy's debt -- which amounts to one quarter of the entire Eurozone's debt -- could create havoc if markets lose confidence in the Italian government's ability to pay its bills. That could lead investors to worry about the health of Europe as a whole and leave the entire region destabilized.
Mundell won the Nobel Prize in 1999 for research that helped lay the foundation for Europe's single currency.
"Italy has got to be worried," Mundell said in a television interview . "If Italy became a target then this would create a big problem for the euro. Whatever is being done to Greece, possibly to Portugal and maybe Ireland, has to also save Italy from that problem."
The Italian economy, Europe's fourth-biggest, risks falling back into recession after contracting 0.2 percent in the fourth quarter. Debt will rise this year to 117 percent of gross domestic product, the second highest in the EU after Greece, according to the European Commission.
Italy's high debt level would create problems for the entire euro region if rising financing costs make it difficult to service the country's borrowing, Mundell said. Italy has about 1.8 trillion euros ($2.5 trillion) in debt, more than five times that of Greece and the equivalent of about a quarter of the euro zone's debt.
If markets were to lose confidence in Italian public finances, then the European Central Bank would have its hands tied by the Maastricht Treaty, which says the central bank must orient monetary policy exclusively toward keeping inflation under 2 percent.