The markets have been under a cloud lately as news from Spain’s banks and government continues to depress perception of Europe as the continent struggles under its sovereign debt crisis and banking difficulties. This time last year the markets were struggling with Europe in the same way except then it was Italy everybody was worried about.

So what happened? Did Italy dramatically reduce its debt and move in strides away from its crisis? Or did the shortsightedness and dismal attention span of the media simply drift on? It’s not the first one.

In July of last year European leaders met to discuss Italy. German Chancellor Angela Merkel said the country needed to send a strong signal to the markets by instituting a harsh austerity regime. In November, after the resignation of Silvio Berlusconi, Mario Monti was asked to form a Government by Italy’s President. He did. That government has now been in power for almost seven months.

In December an austerity bill was introduced and passed. It has been a success in some terms. The deficit fell to 3.9% of GDP and should be at 3% in the next year. Deficit, however, means the country’s debt is growing. It currently stands at around 120% of GDP.

By the end of this year Spain is expected to have a ration of just under 80%. Why is it then that Spain looks like much more of a danger than Italy right now? The real problem is the news cycle. Right now Spanish Banks are in crisis. Italy’s next crisis has yet to arrive.

The drastic cut in deficit has allowed Italy to get into the European Commissions good graces. It has recklessly ravaged the economy. Italy is looking at its highest unemployment in a decade and it is not about to slow down. That is going to hit confidence in the country, already falling faster than other EU nations, exponentially as time goes on.

GDP fell by 0.8% in the first three months of this year. That follows a 0.7% decline in the fourth quarter of 2011 and just 0.2% in the previous quarter. Recession is accelerating in the country.

Mario Monti’s government is not an elected one. It is a national unity government that relied on the support of frightened deputies to institute its reforms. This is similar to the government instituted in Greece.

If the government last to the next election, and given the current economic woes it may not, it will surely face a fate similar to Greece’s. Austerity hurts people on the ground a great deal and they are the voters. Italy’s worst days are ahead of it.

The markets are catching up with this. Italy’s borrowing rates are rising. In its last sale, earlier this week Italy managed an average rate of around 6% on its 10 year bonds. Moody’s Corporation (NYSE:MCO) downgraded a swathe of Italy’s banks in the middle of last month.

Today the European Union looks like it will help Spain’s financial system. That would close the loop in the news cycle making way for a new European story. Cyprus may need a bailout. Italy is still in the doldrums and Greece is heading for elections. Which will it be?

As long as the market, and those in power, continues to focus on Europe one issue at a time the problem will not be solved easily and traders are left open to surprise shocks if a story breaks out somewhere else.

Moody’s downgrade of German and Austrian banks this morning shows that the ratings agency is looking at Europe as a whole. Europe shares a currency and it shares an identity in the eyes of traders. Each country and each crisis  cannot be viewed discretely.

Europe is an holistic puzzle. It is not a string of disconnected financial and sovereign crises. They are interconnected. Italy is heading for a new round of attention as the country’s economy continues to stretch and groan under austerity.

Spain’s financial trouble will be solved, probably temporarily, in the coming days. That won’t signal the end of troubles in the country. It will signal the end of one limited event in a flow rather than a series of them. If traders do not see Europe as a whole and a sum of its parts at once the cycle will continue.