The state debt of Italy is at 130 percent of gross domestic product (GDP). In this case, the country had reduced the debt to GDP ratio since 1995 up to the outbreak of the economic crisis of 2008, slowly from about 120 to about 100 percent. Since then, it has risen sharply. There is no money for public investment and intermediate consumption, which could be used to support the growth. It is up to each game room is missing to be in a recession to counteract, because the debt capacity has been exhausted.

Out of fear of your money back, calling for investors in higher deficits and higher interest rates. If interest rates rise, prices fall. Instead of being an anchor of security, became the AU to the source of the risk for the banks and the wealthy taxpayers. The automatic stabilisers are out of power, because the state can no longer slide the budget further into deficit.

The next recession is distinguished from

banks in Italy, can not tolerate any new shock. They are loaded with bad loans and need to worry about in the case of a recession a Bad thing. The share of bad loans was prior to the crisis, acceptable 6%, but increased from 2008 to about 18 percent. Since 2014, the situation is improving, thanks to the favourable economy, but now the next recession.

Many debtors will get back problems. If the nervousness of the investors makes the prices of government bonds fall, have to worry about the banks new losses. You can’t afford more write-offs. Therefore, they push bad loans to less profitable firms, to draw, instead of lending on growth in strong businesses.

sovereign debt of European countries in the comparison

image to enlarge

The real economy is not better. Plagued by high labour costs, high tax burden and excessive bureaucracy, will affect your competitiveness is difficult. Investment and growth in the lame. So the high unemployment rate can’t fall. The Italians pay for it with a creeping loss of income. While since the introduction of the Euro at the beginning of the zero years in Germany, the real Per capita income 23 percent in the entire Euro area, 15 percent is increased, it must complain of Italy, population about 5 percent loss. The prosperity is less than twenty years ago! One must fear that the people will increasingly populist promises-prone.

the Euro Is a Strait-jacket, the immobilized Italy? With the accession to the monetary Union, the country has given up a lot of autonomy and important adjustment mechanisms. The interest rate and monetary policy of the European Central Bank (ECB) must be geared to the entire Eurozone and cannot refer specifically to Italy into consideration. A depreciation separately for Italy is not possible. Interest – rate and exchange-rate adjustments must be replaced by other adjustment mechanisms. First and foremost, there needs to be a strictly productivity oriented wage determination, which allows for further growth of the economy and competitiveness.

Either Italy finds strength and endurance for radical reforms, or it risked leaving the Euro.

Because the national monetary policy for the economy fails to stabilise, it must strengthen the financial and economic policy, the automatic stabilizers and the domestic sources of Risk to reduce. Therefore, a low state debt and a robust banking sector is necessary. The European framework – macro-economic Surveillance, in the Maastricht criteria for debt reduction, banking Union, and in the case of emergency, the European stability mechanism, the ESM can support the reform process and guidelines for the future. But Italy can’t find out without a national effort out of the crisis. The country is at a fork in the road. Either it’s strength and endurance for radical reforms, or it risks leaving the Euro: A sudden loss of confidence in the financial markets could force him – or, the policy might provoke him with the seductive promise of a quick solution of the problems through the exit.

The consequences can be woodcut-like sketch. As soon as the first rumors about the resignation spread, in anticipation of a sharp devaluation of the new Lira, suddenly, a huge capital flight. Argentina had to after the abandonment of the Dollar peg in the first months of 2002, about 80 percent of the accumulated depreciation. Similar would be expected for Italy. Only who is fast enough, you can bring the assets in a safe Harbor, and before the fall in the value of protect. The savers would rush in panic to the banks to keep their savings in lockable Euro or abroad. The panic sell-off of Italian government bonds would be the interest rates are high and the rates tumble to the Ground.

The state would be insolvent and on the financing with the printing press dependent. The banks could not hold this stunner stand and only with a massive Liquidity injection by the Central Bank to survive. This would cause a big inflation shock, the Wealthy, de facto expropriated. In a sharp crisis, the unemployment rate would rise massively. Many companies and households were insolvent. The pattern is from crisis-hit countries such as Argentina, known. After a large debt, you need to get rid of cut, with the assistance of the International monetary Fund (IMF) under strict reform conditions in the interest of the state of emergency.

Italy, and his creditors

in 2017; graph to enlarge

The consequences could be alleviated, if it is possible, with a multi-week closure of the banks and strict capital controls, capital flight, at least in part. However, it is doubtful that a decision of such magnitude could come as a surprise. Capital flight would probably prevent only partially.

Even if a large part of the state debt is in Italian hands, would trigger the crisis, in view of the shareholdings in the rest of Europe, large losses and lead to crisis developments. It is also not conceivable that Italy could meet its Target liabilities to the ECB. In view of the losses in the rest of Europe a further membership of the EU would rather doubtful. In the case of the departure from the EU more income would be expected to be buses with a permanently by 5 to 7 percent lower GDP.

fate of the new reform

After this shock therapy, the price competitiveness would be with the high devaluation and the real wage loss is made. Italy could grow back faster, also because the state, businesses and households to present to a Debt settlement in a better location. The country could be the interest rate and monetary policy on the own conditions of crop, in order to stabilize the economy better, and it could rely on exchange rate adjustments as a balancing mechanism.

But the problems will disappear leaving just the Euro. Also with its own currency, a country can only be permanently successful if the public finances are sustainable, a strong banking sector guarantees a safe supply of credit and the economy with skilled labour, Innovation and continuous productivity improvements to remain competitive. Devaluations are not the solution, because they make the country compared to the Rest of the world poorer. The necessary reforms do not take place, is programmed to the economic decline. Whether with or without membership in the Eurozone, the fate of future generations in Italy will decide on the ability of the policy to sustainable reforms.

Christian Keuschnigg is Professor of Economics at the University of St. Gallen and the economy directs the political center of St. Gallen and Vienna.

(financial and economic)

Created: 28.02.2019, 17:34 PM