I have a real affection for Italy and the Italians, and the question that continues to bother me remains unanswered: Why is there no progress towards absolutely necessary budgetary discipline? for a country so indebted? As a reminder, Italy is a debt of 2.3 trillion euros, or 132% of its GDP.
Interest rates widen the gap between Germany’s Italy
While in May 2018, a year ago, the gap between the bond yields of the Italian state, were close to 1%, this gap has now climbed to 2.5% for a duration of 10 years. Arithmetically, this equates to an annual increase of nearly 40 billion euros in the deficit, which is still growing
Budget indiscipline increases
In 2020, the interest burden will be close to 4% of Italian GDP, continuing its sad race at the top of the European pack on this metric.
As expected, the Italian government has not kept its word on the 2018 budget agreement. Added to this is a loss on the use of derivatives, which are supposed to protect it against interest risks. It is to wonder how Rome manages its finances. The European Commission has called the Italian government to order and its review of the budget situation in June should be done in blood and tears.
Especially since the accusations of the Commission have been coldly received by a populist government that confuses independence and irresponsibility.
Italy is in recession
At the end of last year, Italy’s GDP growth came in the red. It has increased marginally to 0.2%. Without arguing a few tenths of a percentage, the sluggishness of the Italian economy will not ensure either tax revenues or a fall in the debt, deficit and rates.
Italy will therefore provoke a conflict with the Eurozone in denial. If it were an isolated case, we would be reassured, but the same Commission inevitably reduced its growth forecast to 1.2% for the European Union (which still includes the United Kingdom).
This crisis, added to a banking crisis for two years, leaves no room for maneuver. From all over the world there are declarations which announce a bad will not to come to the rescue of Italy. But the Euro would be threatened by a record debt in 2019. Needless to say that the commitment to sell more than € 17 billion of assets was not held. This time, the Banca d’Italia recognizes the risk that the over-indebtedness of the state will cause the banking system, which would have a pan-European impact.
Overexposed French banks?
The banks most exposed by the Italian debt are French and German: only French banks lent 285 billion euros out of 435 billion in total. For their part, German banks lent more than 58 billion euros to Italian financial institutions. Is the domino effect that threatens France really avoidable?
For decades, all the French, Italian, and European universities and schools have taught Lord Keynes’ General Theory, which preaches the benefits of state debt, stimulus packages, the deficit multiplier.
The many Italian governments have carefully applied this Keynesian discipline, with a practice of debt more assiduous and serious than all the others, with the sole exception of the Japanese.
So what is the cause of your worries? As a good Keynesian, you can only be confident in the economic success of the Japanese and our transalpine neighbors
Even if they decided not to repay their debt, following a practice we taught them, when assignats were issued in Italy during the French occupation of Rome in September 1798