In the light of the fairy-tale coalition program of the Italian populist parties Five-Star-Movement and Lega, which promise at the same time lower taxes (flat tax) and higher spending, the question of the Italian public debt has come to the foreground again. Here a short look at Italy’s long history of public debt problems:
The modern Italian nation state was created in 1861. Italy’s debt problems started soon after the country’s unification. Already around 1870 the debt ratio reached almost 100% of GDP. In 1897, it stood at 117% of GDP. Around 1920, it reached its historic climax with roughly 160% of GDP. Under the Fascist dictator Mussolini, it was at first reduced to 51% in 1926 before reaching 88% in 1934 and roughly 110% during the Second World War. From 1946 until 1981, Italy’s public debt was below the 60% of GDP ratio later required by the Maastricht treaty. In the 1960s, the debt sank to almost 30% before climbing again massively from 54.5% in 1974 to 124,3% in 1994.
Italy wanted to be part of the Eurozone from its inception. Therefore, the Italian government made an effort and managed to reduce the country’s public debt to roughly 100% of GDP; still far from the 60% Maastricht critiera but, nevertheless, a serious effort in the right direction. With the financial and economic crisis starting in 2007, the success was undone quickly. Italy’s GDP fell by roughly 10%. The losses have not been fully recuperated until today. At the same time, the public debt ratio rose again to today’s 132% of GDP.
The spread is still not reflecting the real risk of Italy’s public debt
Some Italians are currently complaining about the spread – the difference between the interest rate the Germans have to pay on their public debt and the rate the Italians are paying. Indeed, in recent days, Germany paid some 0.4% on its public debt which was massively reduced in recent years thanks to Finance Minister Schäuble’s action. It was made possibly thanks to the ECB’s quantative easing. Money become cheaply available to banks, the interest rate on the public debt sank to roughly zero. Germany saved tens of billions of euro, which they used to reduce the public debt.
Italy was unable to follow Germany’s example. Despite the massively reduced interest rate on Italy’s public debt, the Italian governments have not been able to reduce the country’s debt. Italy has not made the structural reforms needed to become more competitive within the Eurozone as well as worldwide. Therefore, the unemployment stands at roughly 11%, the public debt at 132%.
Because of the uncertain political future with the populist Five-Star-Movement and the right-wing, populist Lega most likely soon to govern Italy, the spread between the German and the Italian government bonds has widened. Italy know has to pay over 3% interest on its public debt. But that is still very far from the 11.1% it had to pay in 1995 before the introduction of the euro.
In short, Italy has a long history of a very high public debt. The country has not used the times with massively lower interest rates, which do not reflect the real risks neither of the public nor the private debt. In addition, the times of cheap oil and gaz seem to be over. Italy has missed a window of opportunity offered by the introduction of the euro and later by the ECB’s low interest policy to push through the structural refoms necessary to become more productive, more competitive and more attractive to foreign investors.
Sources: Article based on Italy’s National Institute of Statistics (Istat) and a February 2018 article in the Italian newspaper Avvenire, which includes statistcs from a scientific article by Roberto Artoni, which we have consulted too.
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