Dal FT AIUT!!! Italy debt burden is a burden for us all Perhaps the biggest question facing the economic stability of Europe is what happens if Italy continues to stagnate as it had done for the past 15 years. Will everything just continue as it is now, just a little bit more depressed? I think it is high time to address the consequences of failure with more clarity than is usually done. Put bluntly, Italy’s economic position is unsustainable and will result in eventual debt default unless there is a sudden and durable change in economic growth. At that point, Italy’s future in the eurozone would also be in doubt – and indeed the future of the euro itself. What we are seeing in Italy is the brutal dynamics of debt deflation – where the fall in the price level raises the real value of debt. Between 2007 and 2013, the ratio of Italian public sector debt to gross domestic product rose from 103.3 per cent to 132.6 per cent according to Eurostat figures. For this year, the Organisation for Economic Co-operation and Development expects it to rise to 137.5 per cent. If Italy continues to stagnate in 2015 and 2016, the debt-to-GDP ratio will be heading towards 150 per cent of GDP. The problem is not the number but the trend. A reader recently asked: at what point is Italy insolvent? The answer: nobody knows. Japan is still solvent at a debt-to-GDP ratio more than 200 per cent. But Japan, unlike Italy, has its own central bank. If investors believe that you can stabilise your debt ratio at any given level, they will continue to refinance your debt. If not, they won’t. The main reason for the explosion in the debt ratio has been the fall in nominal GDP – the euro value of economic output. When this falls, the debt-to-GDP ratio rises. It even rises when the country does not incur any new debt. The only way out of this trap is for nominal GDP to rise faster than debt. But Italy lacks the policy instruments. It has no domestic interest rate it could lower. It has no central bank that could monetise its debts. It has no exchange rate it could devalue. There are eurozone equivalents to all of these. But eurozone interest rates are already at zero. The European Central Bank is not (yet) buying Italian government debt. And the euro would have to devalue by some 60 per cent for Italy to achieve a devaluation of a similar magnitude to that of 1992, when the Italian lira temporarily left the European exchange-rate mechanism. What about economic reforms? They may help generate some growth in the long run, but it is a little naive to think that the economy will miraculously start to grow once companies can fire their staff. The economic adjustment needed goes much beyond a few structural reforms. Italy needs changes in the legal system, it needs to bring taxes down to the eurozone average, and to improve the quality and efficiency of the public sector. It needs, in other words, to change the entire political system. Even that may not be enough. Remember that Japan has a flexible labour market, a well-oiled legal system and comparatively low taxes. Yet the Japanese economy has continued to disappoint for more than two decades. So what are the realistic options? The best hope lies in a programme of ECB asset purchases that would buy time for European inflation rates to return to normal, for the eurozone economy to pick up, and for the Italian government to implement at least some reforms. I could see the ECB buying a wide range of debt instruments, starting with asset-backed securities and covered bonds as already announced. On top of that, it could buy other types of financial securities – bonds from the European Stability Mechanism, the eurozone’s rescue umbrella, and from the European Investment Bank. The Commission could use the EIB to launch a big programme of infrastructure bonds. The best hope for Italy is that some of that trickles down into the real economy. I am optimistic that these programmes will have a noticeable positive effect on the eurozone as a whole, but much less certain of their effect on Italy. We are in a situation where we need a lot of extreme and co-ordinated policy action to make it possible for Italy to grow, service debt and ultimately stay in the eurozone. But policy so far has been neither extreme nor co-ordinated. Matteo Renzi, Italian prime minister, has promised radical reform, but not yet delivered. However, this is not enough. Italian debt sustainability requires policies at eurozone level that have so far been ruled out. This is where the eurozone’s success or failure will be decided.
Posted on: Thu, 25 Sep 2014 14:23:09 +0000
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