More than anything, Italy is in dire need of fiscal austerity: the country’s public debt has reached $2.6 trillion, the equivalent to 120 percent of the country’s gross domestic product.

In a dramatic development that increases the pressure on the euro zone, fears that Italy could default on its debt drove yields on the country’s benchmark ten-year bonds over 7 percent on Wednesday. That’s the threshold that sent Ireland, Portugal and Greece scurrying for bailout funds earlier this year.

The stakes are far higher with Italy, which has an economy nearly three times larger than Ireland, Portugal and Greece combined. If Italy goes bankrupt, it is unlikely that the euro currency would survive.

Analysts say that the Italian austerity package is far too small to do much good. And the fact that Berlusconi has tied his political fate to the passage of the package may assure that it will become bogged down in political bickering that may mean Berlusconi’s remaining tenure will be measured in weeks or perhaps months, rather than days.

Once he is gone, President Napolitano will have several options. He could ask some figure to try to cobble together a majority government among the sitting parliament, or he could call for new elections to shuffle the deck. In the meantime, Berlusconi could remain prime minister with restricted powers as an overseer to a caretaker government, or he could be replaced by an appointed figure who would help oversee fiscal and political reform plans before elections take place.

Two names that have been floated as possible appointees to head a temporary technical government are Angelino Alfano, the head of Berlusconi’s Polo di Liberta (People of Liberty) political party, and the highly respected Mario Monti, the former European Competition Commissioner who has in the past refused joining governments from both the left and right.

Whoever ends up filling Berlusconi’s shoes, he will face severe economic problems. Markets had mixed reactions once speculation began that Berlusconi could be on the way out. The Italian Stock Exchange in Milan closed in positive territory on Monday and Tuesday and was trading higher early Wednesday before plunging on the news that a key trading house was increasing margin requirements on the country’s debt.

No matter what happens in the short term, Italy remains the sick man of Europe: youth unemployment surpassed 30 percent for the first time this summer; the country suffers from a bloated public sector in which most jobs are handed out based on personal connections rather than merit; there is a steady exodus of skilled and highly educated Italians who opt to work outside the country; the Italian Treasury suffers from massive levels of tax evasion; and the country has the most expensive pension system in the world in per-capita terms.

It is likely that the new leader will lack the gravitas to tackle these problems, at least at first. Berlusconi was skilled at cutting down rivals at the knees before they achieved support levels or visibility to challenge him, leaving a field of under-experienced and flawed candidates to fill the void Berlusconi leaves.

And it is best not to forget that Berlusconi will remain a key force in Italy. Being prime minister is, after all, his second vocation, and only one of his levers of power. His day job is as Europe’s richest media tycoon, where his holdings include three national television networks, a leading daily newspaper, a major news magazine, a large film production and distribution company, and Italy’s largest advertising media buyer.

Unless he has a say in who takes his place, he will likely use his media empire to make life difficult for Italy’s first post-Berlusconi leader.

But one of the central ironies of this case — and the case had a gluttony of ironies — is that Amanda Knox was extremely fortunate to be tried in the Italian system. Amanda Knox was well aware of this. In Italy, a “life” sentence carries a maximum of 30 years, with time off for good behavior. If Knox had been convicted of murder in her home state, Washington, she would have been on Death Row. In Washington, prisoners sentenced to the death penalty must choose whether they would like to be killed by lethal injection or by hanging. (Washington is the only state that still allows prisoners to be hung.)

Knox’s odds of winning an appeal would also have been dramatically slimmer. While the initial jury trial in Italy resembles an inquisition — the prosecutor assuming the scolding tone of a disappointed Catholic priest — the appeal tilts heavily toward the convicted. In the United States, an appeal can only address issues of law, not of fact, providing limited opportunities for a reversal of the original ruling. In Italy, the appeal is a full do-over. Witnesses are hauled back to the stand, judgments of opinion are freely questioned by the appeals judge and, most crucially, evidence is re-examined.

The critical finding in Knox’s appeal was made by a team of independent experts who ruled that the DNA evidence connecting her and Sollecito to the crime was too weak to satisfy basic international forensic guidelines. In the Italian system, the appeal is often perceived as an act of Christian mercy; it frequently leads to a reduction of sentence, if not a full acquittal. This gives the Italian system a flexibility than its American counterpart doesn’t have.

Now Knox will be whisked into a uniquely American ritual: a private jet back to Seattle; a press tour; book and film contracts; engulfing paparazzi; an adoring fan base and death threats. Then the cameras will disappear and a nation will wait, bereft, until the next beautiful young woman is accused of murder. And Knox, gradually, will begin to live.

Nathaniel Rich covered the Knox case for Rolling Stone and is the author of the novel “The Mayor’s Tongue.”

“What we view as the Italian government’s tentative policy response to recent market pressures suggests continuing future political uncertainty about the means of addressing Italy’s economic challenges,” S&P managing director David T. Beers wrote in a research note outlining the credit rating downgrade.

Last week, Italy’s Parliament gave final approval to Premier Silvio Berlusconi’s government’s austerity measures, a combination of higher taxes, pension reform and spending cuts. The planned cuts and taxes sparked street protests in Rome similar to those in other European countries trying to come to grips with the economic crisis.

Berlusconi has said that the government’s austerity measures will shave more than 54 billion euros ($70 billion) off Italy’s deficit over three years.

The European Central Bank had demanded stiff austerity measures to calm markets roiled for weeks over doubts about how serious Italy is about coming to grips with its debt. Italy is the eurozone’s No. 3 economy and has a deficit to gross domestic product ratio of 120 percent, one of Europe’s highest.

The bank has spent billions over the last month buying up Italian government bonds in a bid to lower Italy’s borrowing costs and keep it from becoming the next eurozone nation to need an international bailout. The S&P downgrade, however, could lead to higher borrowing costs for Italy because it implies that investors face greater risks when buying Italian debt.

S&P said that weaker economic growth will likely limit the effectiveness of the government’s economic plan.

“We believe the reduced pace of Italy’s economic activity to date will make the government’s revised fiscal targets difficult to achieve,” S&P said.

The firm projects that Italy’s real gross domestic product will grow at an annual average of 0.7 percent between this year and 2014, down from an earlier projection of 1.3 percent growth.

Italian officials have reportedly held talks with China’s sovereign wealth fund in an effort to persuade Beijing to buy Italy’s government bonds or invest in its companies. The nation’s financial crunch also has prompted Rome to consider selling stakes in major state-owned companies such as power utility Enel or oil and gas supplier Eni, according to news reports.

Italy, the eighth largest economy, is a founding member of the U.S.-led Group of Seven (G-7) club of industrial economies that until recently called the shots in the global economy. Not long ago, the idea that a global export and financial powerhouse like Italy would turn for assistance to China, the chief proponent of authoritarian state capitalism, would have raised alarm bells in the United States. America would have scrambled to engineer a rescue, as it did in Mexico in 1994, South Korea in 1998 and Brazil in 1999 — and as it had for Europe both financially and militarily, in two world wars.

China previously has stepped in to offer loans to far smaller economies, including Portugal, Spain and Greece. It also helped investment banking giant Morgan Stanley stave off collapse by purchasing a large share at fire sale prices during the 2008 global financial crisis.

Italy’s appeal to China, however, signals something new.

The past three years have delivered a stark reality check to the American superpower. Offering financial help to even its closest allies these days would be an exercise in keeping up appearances. America — and Japan, Britain, France and, yes, even Germany, have their own deep financial problems.

Instead, the Italian-Chinese talks sparked a statement from Brazil’s finance minister announcing that the so-called “BRICS,” Brazil — Russia, India, China and South Africa — will meet on Monday to see what can be done for the sick man called “Europe.”

As the perpetual crisis in the most developed economies indicates, the world that emerged out of the cauldron of the American century is unraveling. The decline of U.S. economic and political influence is clear, as is the rise of the BRICS and other emerging powers. Much has been written about the policy mistakes, demographic problems and debt woes that beset the old “West” and its Asian protege, Japan.

But most analysts have underestimated the potential speed of American decline. Very few have grappled with the consequences for U.S. and its allies as the American-led status quo across the globe begins to fray and even break apart.

Do not be fooled: America’s global military dominance rests entirely on its ability to pay its bills. Military juggernauts with dysfunctional economies end up in the same predicament, most recently exemplified by the fall of the Soviet Union. By the time the USSR was declared dead, even the Soviet military — only 20 years earlier a match for any on the planet — had deteriorated to the point where recruits had starved to death at one military base; warships rusted at their moorings for years; and control of the military’s version of the crown jewels, the nuclear arsenal, was seriously under threat.

No direct comparison can be drawn between the incompetence of Soviet state central planning and the flaws of American-designed global capitalism. The U.S., for all its mistakes over the past several decades, remains the vital player in global economics, and will remain the world’s largest for decades to come.

But therein lies the planetary danger: the Soviet economy’s collapse affected primarily a small group of similarly distorted economies tied to it through communism’s version of the Commonwealth — called Comecon. For Cuba, Eastern Europe, selected African despotisms and Moscow-friendly India, it was a disaster. For the rest of the planet, it was pleasant surprise and an opportunity.

In contrast, the U.S. economy is so large and the rest of the planet’s holdings of dollars and U.S. debt so endemic that America’s fate concerns everyone, friend and foe alike. China, Russia and the Gulf emirates fear an American debt default far more than American military might — as their chiding of U.S. fiscal prevaricating shows.

China has made similar appeals to European economic policymakers, urging them to put aside the domestic political concerns that so far have taken precedent in the rich E.U. countries, preventing a true solution to the tumbling dominoes of the euro zone periphery, the so-called PIIGS: Portugal, Ireland, Italy, Greece and Spain.

The U.S. and China, along with all major economies that depend on selling goods to the gigantic E.U. market, are terrified about the prospects of a “lost decade” taking hold in Europe. Such stagnation would further collapse demand and consumption that’s already struggling in the absence of the once-spend-happy American consumer.

Partly for that reason, last week the Fed and European Central Bank reestablished a “swap” capability so Washington could pump money into Europe’s banks if worst comes to worst — a move seen as crucial to Europe’s vast economy.

But politically, the implications are deep and so far unappreciated. Think of it: the uncontrolled unraveling of Lehman Brothers, a second-tier investment bank, nearly caused the global financial system to crumble in 2008. And now, the threat of default of a small sovereign player like Greece could destroy the European Union’s common currency. In comparison, the uncontrolled unraveling of U.S. power would be a disaster of global proportions.

Britain’s long retreat from global dominance in the early 20th Century sparked civil wars and left geopolitical Gordian knots like Kashmir and Palestine and Northern Ireland all over the planet. Likewise, the pull back of American power in our time will expose, for the first time in decades, parts of the geopolitical shoreline that American power, political will and diplomatic influence have heretofore sheltered.

It could be that the world suffers right now from a kind of “crisis fatigue.” After all, the spectacle of European economic powers appealing to China for massive purchases of their shaky government debt follows on some truly scary episodes:

• the effective bankruptcies of three European states — Greece, Ireland and Portugal, met feebly by European Union politicians with half-measures, parochialism and denial.
• the battering of Japan’s economy by a combination of natural, man-made and policy-induced disasters, a combination that has it well into a third consecutive “lost decade” of debt and low growth.
• the theater of the absurd in Washington, with know-nothing politicians threatening to default on the United States debt and sparking the richly deserved downgrade of its long-term credit rating from AAA+ to AA+ by Standard & Poors.

Well, sorry for the fatigue. But as the great Al Jolson said in 1927, on the cusp of another great calamity, “Folks, you ain’t seen nothing yet!”