When the Morandi Bridge in Genoa collapsed this summer, taking with it 43 people's lives and another 600 people's homes – all of Europe was looking at Italy. Ailing infrastructure, indebted state, newspapers wrote. The country just before the crash – just like the truck that managed to stop on the bridge just before the abyss and whose image went through the world press.
Low economic growth
In this regard, Italy has long caused worry lines on the foreheads of economists in particular. While the OECD forecasts an average of 2.1 percent economic growth for all eurozone countries, Italy is only expected to grow between 1.1 and 1.3 percent. After all – between 2010 and 2017, it was only an average of 0.4 percent per year. Italy has been the slowest growing economy in the currency zone for years, but at the same time the third largest after Germany and France.
The new government, led by Interior Minister Matteo Salvini, who has been in office since June 2018 and is in the crossfire almost daily because of his refugee policy, now wants to get down to business: The coalition partners had promised the Italian people numerous relief measures and investments at the election. The unemployed should receive basic benefits, older people should be allowed to retire earlier, and working people should pay less income tax. Gifts for Italians to make up for through consumption.
High government debt
Now it's a matter of getting the campaign promises into the state budget. Into a national budget that is already in trouble: 132 percent of gross domestic product is the Italian national debt, up to 60 percent is allowed by the Maastricht Treaty – actually. Only Greece reports an even higher figure of 180 percent to Brussels. Economists agree that Italy's budget currently poses the greatest threat to the EU's financial stability, and declining investment in the country confirms this assessment.
Figures: Eurostat, Graphic: VIA Delcredere Ltd, 2018
The specifications from Brussels one wants to keep, let Salvini now announce. It is unclear how this is to be achieved in practice: An already heavily indebted state now wants to spend even more money in order to achieve financial stability? Instead of urgent savings, additional spending should reduce the debt burden? In order to achieve this, annual budget surpluses will be necessary from 2020 onwards, according to a recent scenario calculation by the Halle Institute for Economic Research (IWH). If it were also possible to stimulate growth through structural reforms, the mountain of debt could be paid off even faster. In our view, the planned additional spending can only generate short-term economic growth.
Too many unemployed
To understand why the Italians have elected a government that wants to continue fleecing their budget instead of focusing on sustained black figures or at least fewer red figures, it is enough to look at the unemployment rate. The unemployment rate in Italy has been comparatively high for years, and at 31.7 percent, youth unemployment is downright depressing. How can a state remain healthy if it offers no prospects for young people?? At this point, it's no longer just about consumption, but about the future and social security.
Investments, however, become all the more important, both from domestic and foreign companies. Attracting companies that create jobs, productivity and hope. But instead of taking care of these companies, the state prefers to take care of a crisis bank from Siena. Monte dei Paschi, which was saved from bankruptcy last year with state funds, is far from having found calm waters and its future is uncertain. In the summer, a Lega politician triggered share price plunges with his statement that he wanted to keep the bankrupt bank in state ownership. The loss amounted to 433.7 million euros.
Help from Europe
When a budget is in trouble, the call goes out to Europe: The European Central Bank should shore up the country through bond purchases, the government demands. At around 2.8 percent, Italian government bonds offer a comparatively high yield – which now means nothing other than that they are very risky. The yield on the ten-year government bond of the Federal Republic of Germany is currently just 0.4 to 0.5 percent.
A few days ago, the Italian government received a rejection from Frankfurt: ECB chief Mario Draghi, himself an Italian citizen, insists on compliance with the eurozone's stability criteria. Countries with high debts in particular should "rebuild their buffers". Meaning: no exceptions, not even for Italy.
Draghi is not the only one expecting action. Italian citizens need social security, domestic and foreign companies need economic stability and reliability – and the eurozone needs clear evidence that the government is working on sustainable debt reduction. This is what Salvini and his fellow coalition members will have to measure themselves against.
Deliver to Italy? Do you have Italian business partners? We are happy to check how well you are covered against bad debts. At this point, also remember that Italy still "shines" with a very poor payment record.