Italy’s Newest Crisis

The economy of Italy has been in the doldrums for about a decade now. Every now and then, the world media is abuzz with details of the economic problems facing Italy. Italy has been taking several loans from the IMF and other European nations in order to stay afloat.

In Oct 2018, the Italian government presented a budget which was much more expansionary than its previous budgets. The underlying reason behind this expansionary budget was the slow growth in Italy’s economy. Italy wanted to counter this slow growth with increased government spending.

This is the reason why there was a projected increase in budget spending. There result is a projected deficit of 2.4% of GDP which is a massive threefold increase from the previous years. The problem is that Italy already has too much debt. Their total external debt is 130% compared to their GDP!

The problem has been created by borrowing too much money in the first place. However, somehow the Italian government believes that it can solve the crisis by borrowing even more. Obviously, that did not happen. As soon as the Italian government made its budget public, the entire European economy found itself in the middle of turmoil. The announcement resulted in a massive crash in the Milan stock market. Banking stocks were the hardest hit, and in many cases, the trading in these stocks had to be suspended in order to check the downfall. The yields on the Italian bonds also started rising extremely high.

In this article, we will have a closer look at this newest Italian crisis.

The Rise of Populism

The Italian governments of the past have been big spenders. For the past many years, the government spending constituted more than 50% of the GDP of Italy. However, after the turmoil, the IMF has imposed strict austerity measures on the spending by the Italian government. This has led to anger amongst the Italian people who are viewing this austerity as loss of sovereignty.

Also, the Italian economy has faced a double-dip recession since 2008. The economy is growing at a miniscule rate of 1% per annum. This is being attributed to the forced fiscal tightening. The unemployment rate in Italy is as high as 30%. A large number of unemployed youth are creating political turmoil within the nation. The end result has been the election of a populist party in 2018. Ever since the new government has come into power, they have been defying the diktats of the IMF. Hence, the reason behind the brazen budget of 2018 is the Italian government’s need to play to populist motives in order to stay in power.

Why Does It Matter Outside Italy?

If the Italian government has decided to enact certain suicidal policies, then the brunt will also have to be borne by Italy, right? Well, it does not seem like that is the case!

Firstly, it is important to understand that the economy of Italy is deeply integrated with all of Europe. This means that almost all major European banks hold Italian debt.

Given the fact that Italy has more than 130% of its GDP in debt, there is a lot of Italian debt floating around in the market. This 130% debt is more than twice the level which is generally permitted by the Eurozone. Therefore, the current situation is that every European bank has a significant amount of Italian debt on its books.

If the value of this debt falls sharply, then the solvency of European banks will also come into question. It is likely that a fall in the value of the Italian debt will be the trigger point of the financial doom that many analysts have been predicting for a very long time now.

Secondly, the European Central Bank and the IMF just don’t have enough money to bail out Italy if the need be. The Greek economy was relatively small. Hence, the IMF and EU could muster up $300 billion to bail it out when the going got tough.

However, the Italian economy is massive. It is currently valued at $2 trillion, and the IMF and EU put together do not have the wherewithal to bail out Italy if required. The Italian economy is the opposite of “too big to fail.” Instead, it is “too big to save.”

The Future

At the present moment, the budget is only a proposed action. It is likely that this is all just a ploy by the new Italian government to put pressure on the EU. However, if that is not the case, EU can also reject this budget. This is an action that EU has never taken and it will immediately make it unpopular with other member states.

If the Italian government still decides to go ahead, the European Union can impose certain fines and penalties on Italy as well. However, if the EU and Italy are not aligned, there might be tectonic changes which will suddenly happen in the financial world of Europe.

To sum it up, the current Italian non-co-operation has the potential to grow into a full-blown financial crisis if the situation is not managed properly.

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