Italy’s Fiscal Crisis
Intereconomics, Review of Europen Economic Policy, Vol. 76, No. 6, p. 332-339, November-December 2011
20 Pages Posted: 3 Oct 2011 Last revised: 5 Apr 2017
Date Written: October 3, 2011
Italy has become recently one of the vulnerable economies of the Euro zone under threat to end up in a debt trap of its public finances. The recent downgrade by S&P of Italy’s sovereign debt rating is just one step into the direction of a future sovereign debt crisis which is looming at the horizon. Similar to Greece Italy has accumulated vulnerabilities of its economy already over the past twenty years. The debt-to-GDP-ratio began to deteriorate already in the early 1990’s. Managing by manipulating its GDP accounts and through financial engineering of its government revenues through carry trades in 1995 combined with currency swaps in 1996 Italy managed to pass the stability test in 1997 to become a member of the Euro zone. However, due to the huge interest rates savings Italy’s efforts to bring their fiscal position on a sustainable path and stimulate the economic growth of its economy through major structural reforms were miniscule. This lead to a gradual loss of competitiveness of the Italian economy inside the Euro zone in particular opposite Germany and outside the Eurozone because the appreciation of the Euro after 2003 opposite the US-Dollar combined with above average inflation rates compared to the Euro zone made the situation more and more fragile. This became dramatic after the break-out of the global financial and economic crisis in 2007/2008. Now, under severe pressure of financial markets Italy face a dilemma. How to stimulate growth in the short-run and bring down the fiscal deficit position towards to fiscal sustainability? Even with huge fiscal support from the other member countries of the Euro zone the future perspectives of Italy look rather bleak.
Keywords: Italy, Euro zone, fiscal policy, sustainability, debt trap, sovereign default risk
JEL Classification: E01, E42, E62, F36
Suggested Citation: Suggested Citation