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The agreement between the European commission and the Italian government is a bluff

  • 19 December 2018
  • Philippe Waechter
  • Budget Deficit
  • Public Debt
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Despite the agreement between the Italian government and the European Commission, the question of the Italian public debt sustainability is not solved. The marginal move from the government (reducing its budget deficit to 2.04% of GDP vs an initial 2.4%) is not sufficient to explain it.
The best explanation is that no one wanted to have the responsibility of a deep European financial crisis linked to the lack of liquidity of the Italian debt market The commission has accepted because the situation was not manageable.
In the short term, investors will be pleased and the spread with the German Bund will narrow. But the main question is not solved. Growth in Italy is too low.
The Italian economy is already in recession (GDP growth was negative in Q3 and companies’ surveys are on the contracting side of the economic activity) this means that the budget deficit will converge to 3%, not 2%
The question on the debt is that interest rates are higher than the GDP nominal growth. Therefore the public debt to GDP has a growing bias(a snowball effect). Italy has had a primary budget surplus for years, it is not the question. For Italy a sustainable path for its public debt must find a way to make the government credible in order to limit the premium on its interest rate and to find a way to boost its growth. Who can imagine that? Be prepared then for the next financial crisis it is coming

Related Topics
  • Budget Deficit
  • Public Debt
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