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Italy hopes to leave austerity behind

After a rather lengthy post on evaluating EU fiscal rules, a more immediate and simple political criticism of the EU’s general austerity policies from Mr Bersani of the Italian Democrats (Pd). The new Italian political leader has argued:

“We must leave the austerity cage,”

“A change of course is absolutely necessary given that five years of austerity and attacks on workers have pushed up public debt levels across Europe,” he said.

“The vicious circle between belt-tightening and recession is putting representative government at risk and making it impossible to govern. The immediate emergency is the real economy and joblessness,” (link)

The unfortunate situation is that if Italy does reject austerity and pursue a more accommodative fiscal policy, the ECB is likely to end its bond purchase programme. This could send Italian bond yields soaring. Bond yields will soar because there is no Central Bank to ensure liquidity. If Italy had its own Central Bank, it could easily pursue a fiscal policy more concentrated on economic recovery. But, unfortunately, an attempt by Italy to halt austerity could effectively vetoed by the intervention (or non-intervention of the ECB). Unless there is a change of heart within European economic policy, but that is hard to see.

It is an unfortunate situation, to say the least.

Italy has a relatively low budget deficit, but still the EU rules call for more austerity.


Italian Deficit. Source: ECB

Excluding interest payments, Italy has a significant primary budget surplus.

primary-budget-deficitsSource: OECD Economic Outlook June 2012


Italian Economic Decline

In the past 20 years, the Italian economy has stagnated compared to its main international competitors. Using different measures, such as labour productivity and relative GDP growth – Italy has fallen significantly behind. Despite low budget deficits (and primary surpluses) Italy is facing high bond yields and crippling interest payments. These high bond yields are in response to both the high levels of debt – but also the continued economic weakness.

Italian Productivity

italian productivity

Italian productivity relative to the UK. In the 1990s and 2000s, Italian output per workers has fallen behind it’s main competitors. It’s a similar story if we compare Italian productivity to France or Germany.

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Italian Debt Crisis

Italy has struggled to reduce national debt as a % of GDP since government debt has risen to over 100% of GDP in the late 1980s

National Debt Italy

  • Italy has the second highest public sector debt in Europe, after Greece. The IMF predict public sector debt of 123.4 % of GDP in 2012.
  • By 2013, Italian national debt is forecast to 123.8%

italy debt


Historical Italian National Debt


Source: Debt and Growth in G7 (up until 1970s, Italian debt was below 50% of GDP. Source: Krugman)

Italian Budget Deficit

Despite the large total debt, Italy has a relatively low budget deficit as % of GDP.


Italian Deficit. Source: ECB

The Estimated budget deficits for 2012 and 2013 have been revised. The IMF predict that the deficit will be 2.4% of GDP in 2012, above the government’s own target of 1.6% (Reuters)

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