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Europe’s Debt Crisis Arrives in Italy

Will Italy become the next European country to need help managing its debts?

by
Soeren Kern

Bio

July 16, 2011 - 12:00 am
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The plan calls for freezing public sector pay, reducing funding to local government and health services, increasing the retirement age, and cracking down on tax evasion. Italians will also have to pay €25 for some non-emergency hospital visits and €10 above existing fees to see specialists. The aim is to cut the budget deficit from 3.9 percent this year to 2.2 percent in 2013 and to balance the budget by 2014.

Despite opposition from industrialists and workers alike, the austerity package won parliamentary approval on July 15. The bill won 314 votes from the 630-member chamber, not an absolute majority but enough to muster passage given absences and abstentions.

Berlusconi hopes passage of the bill will ease market tensions. But the bulk of the measures will not take effect until 2013-2014, by which point the politically unpopular package may become diluted. Moreover, general elections are due in 2013, which also casts doubt on the plan’s long-term credibility.

In any case, cutting the deficit to 2.2 percent by 2013 would result in only a very modest drop in the debt-to-GDP ratio to 115 percent by 2013. Italy will still accumulate €120 billion in additional debt between now and 2014, according to Senate Finance Committee President Mario Baldassarri.

Italy’s anemic economic growth will make it difficult to tame the debt even if the budget measures are approved and the government manages to balance the budget in 2014. The Italian economy grew only 0.1 percent in the first quarter of 2011 and the median forecast in a quarterly Reuters survey of around 20 analysts points to an annual rise of just 0.9 percent in Italian GDP in 2011.

Everyone seems to agree that Italy’s growth problems are structural and systemic. As noted recently by the Economist magazine: “Between 2000 and 2010 Italy’s average growth, measured by GDP at constant prices, was just 0.25% a year. Of all the countries in the world, only Haiti and Zimbabwe did worse.”

Says the Economist: “Many things contribute to these gloomy figures. Italy has become a place that is ill at ease in the world, scared of globalization and immigration. It has chosen a set of policies that discriminate heavily in favor of the old and against the young. Combined with an aversion to meritocracy, this is driving large numbers of talented young Italians abroad. In addition, Italy has failed to renew its institutions and suffers from debilitating conflicts of interest in the judiciary, politics, the media, and business. These are problems that concern the nation as a whole, not one province or another.”

Meanwhile, Berlusconi’s government is embroiled in a series of corruption and sex scandals involving the prime minister himself and many of his associates. In Italy’s latest political scandal, Agriculture Minister Francesco Saverio Romano, an important ally of Berlusconi, is facing charges of helping the Mafia. And on July 9, a Milan appeals court ordered Berlusconi’s holding company Fininvest SpA, which is run by his daughter Marina Berlusconi, to pay €540 million ($770 million) in damages to a rival company in connection with a two-decade-old corruption case.

With Berlusconi’s popularity at an all-time low of around 30 percent (with no obvious successor in sight), his government is weak and lacks the political capital needed to implement the sweeping changes required to restore Italy to economic and financial health.

Shaken by the prospect of financial meltdown, Berlusconi declared that Italy is “in the front lines of an economic battle” and must “accelerate the process of austerity within a very short time frame.” But his austerity package may grant Italy only a brief respite in the present crisis. In the words of Finance Minister Tremonti: “Like with the Titanic, even the first-class passengers can’t be saved.”

Italy is facing a “no-win” situation: Austerity measures and long-overdue reforms to Italy’s labor market, where workers are over-paid and notoriously under-productive, will grind to a halt already stagnant economic growth. Without those reforms, however, investors are bound to flee Italy, increasing the risk of a debt default that would have consequences far beyond the country’s borders. Either way, the glory days of Italy and its much-vaunted social welfare state are long gone and unlikely to return anytime soon.

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Soeren Kern is Senior Analyst for European Politics at the Madrid-based Grupo de Estudios Estratégicos / Strategic Studies Group. Follow him on Facebook.
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