Will Italy trigger more EU economic problems?

Political Crisis

Will Saturdays resignation of Italian Prime Minister Mario Monti trigger wider problems for the EU?  Monti, the leader of the so called technocrats who have been running Italy for the last year trying to put the countries economy back on track  resigned after Berlisconi’s People of Freedom Party (PDL) withdrew their support for the administration.

This move comes after the discredited Berlisconi announced that he intended running for the post of rime minister again. This news seems unbelievable, but is symptomatic of the Italian problem – distrust of politicians and what appears to be a cultural resistance to taxes.

Monti stepped into the top role to try and impose some control on the Italian economy and administer the sort of austerity that has been experienced across Europe in some form or other.  This has led to increase and vociferous opposition to the current regime which has incredibly allowed Berlusconi to think he can rekindle his political career.  From outside this seems incredible, but backed by his media empire it appears that he has already knocked Monti out of the top job to create a vacancy, it only remains to encourage the electorate that imposed financial prudence is not the only way and that he can give Italians “their cake and eat it”.

Financial Crisis

The problem facing Italy along with other EU countries including the UK stems from high levels of borrowing and lack of growth.  Italy has borrowing of about 123% of GDP, but before we start feeling smug about the UK’s mere 80%, were we to use the same formula used by the Euro zone to calculate debt as a percentage of GDP the UK’s dept would be close to 100% .

However, providing the economy is creating enough surplus to cover the cost of borrowing and there is growth then it can survive. However Italy can only pay the costs of borrowing because it has been able to borrow at reasonable rates – which will not be the case in the future if Berlusconi steps back onto the political sage.  As to growth, the Italian economy has been ‘flat lining’ over the past few years and has generally been in decline for the past 10 years while cost, particularly labour costs have risen.

So what?

It is easy to take the view ‘So what?’, why worry so much about Italy, there are other European countries with worse problems – the so called PIGS Portugal, Ireland, Greece and Spain.  But what we forget is that Italy is far more important than these it is the fourth largest economy in Europe and it’s GDP at 1,822 €bn is greater than the GDP of the PIGS put together. (Portugal 252.2 €bn Ireland 170 €bn Greece 181€bn Spain 1,051 €bn)

So Italy’s problems could mean that growth in the EU will continue to be slow – one of the factors identified in the chancellors Autumn Statement in Wednesday for the slower than forecast recovery of the UK economy, which will only mean more pain for us.



The Economist

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