Italy, the eurozone’s third-largest economy, is simply too big to bail out. The pot of money allocated for bailouts isn’t bottomless, and there simply isn’t enough left in the kitty for Italy. Yet still it shuffles hopefully towards a financial rescue. The best way forward may be for Italy to tax the considerable wealth of its citizenry.
Italian prime minister Mario Monti has warned that Italy may need to avail itself of the euro’s rescue mechanisms in the future. He has made it clear that current bond yields are unsustainable, and is keen for the ECB to take steps to bring them down.
Italy has made good progress so far in terms of economic growth – before interest is taken into account it has a budget surplus (in other words, it has made more than it has spent). It isn’t all roses for Italy, though. Public opposition to austerity measures is growing, as unemployment figures reach a 13-year high of 10.8%. Not only that, once interest repayments are accounted for, Italy is still in recession (still spends more than it earns).
Certain sectors have embraced the need for spending cuts. VAT has been increased from 20% to 21%. A new real estate tax is being introduced, as well as additional tax increases, pension reforms, and a cap on wage growth. Italy also has an action plan; with the backing of the IMF, to reform its product and labour markets with a view to growing its economy by as much as 6%.
The proposal for reforms take several forms; the Italian economy is mostly based on what we call “non-tradeables” (goods and services produced and consumed domestically – in other words they are not imports or exports). This means that Italy is fairly self-reliant; in fact 70% of Italy’s total goods and services are produced and sold in Italy.
Italy seems confident that it can increase the price of non-tradeables by as much as 60% (thereby introducing a tax, of sorts, on its citizenry), an action which could potentially increase the economy by 6% in a surprisingly short space of time.
In June, Italy’s government debt hit an all-time high of almost 2 trillion euros. Given all the talk of austerity and reforms, it comes as a surprise that the size of this debt is growing at an ever-increasing pace. In the last nine months (since the ‘peak’ of the crisis in September 2011) the growth in Italy’s debt has surged to EUR 9.5 billion per month. In 2008, debt had previously been growing by EUR 6.4 billion per month – still a huge figure but EUR 3.1 billion smaller than the current rate.
The Bank of Italy – the central bank of Italy – reported a €1.1 billion increase in debt for the first half of the year, compared with the figure for the previous year. This means that the total debt for the first half of the year was €47.7 billion. This increase was actually due to an increase in spending to help other eurozone countries, which rose to €16.6 billion from €6.1 billion in January-June 2011. Whichever way you look at it, it’s a pretty hefty credit card bill.
Italy is itself under pressure to request help from Europe’s bailout funds. This move is widely seen as the only way to bring down soaring borrowing costs, but the government has, so far, resisted going down this particular road. This is why the Italian position is so critical, because if both Spain and Italy move from the ranks of the “bailing out” to the ranks of the “bailed out”, then the burden on the rest of the euro area rises, might tip other eurozone members toward crisis.
Things are already getting tougher for the Italians. Disposable income in Italy is lower than it was 20 years ago, and political opposition has risen. Finance Minister Vittorio Grilli says Italy will miss its 2012 repayment goal because of worse-than-expected growth. Despite these concerns, Italy has no plans in place for additional budget cuts, because – for now – it is on target to meet its debt-reduction targets.
In PART 6 of our eurozone report, we look at:
- How Cyprus has weathered the eurocrisis.
- The recent good news which bodes well for Cyprus.
- How Cyprus’s friendships might yet bail it out.