Some Facts About Italy

November 7, 2011

In the euro debt crisis, the spotlight is turning to Italy.  Here are seven reasons to be concerned.

  1. Italian government debt as of 2010 totaled 1.84 trillion euros.  That’s about three times larger than the combined debt of Greece, Ireland, and Portugal, and it’s 44% greater than the total of Spanish, Greek, Irish and Portuguese debt
  2. Although Italy’s budget deficit of some 3.5% of GDP is surpassed by several other EMU countries, the cost of debt service is tied to the outstanding level of debt and prevailing market interest rate.  Fear of contagion has driven the 10-year Italian sovereign bond yields above 6.5%.
  3. Italy is the third biggest economy using the euro, with a population that slightly exceeds 60 million.  Italy was one of the six original members of the Common Market, founded in 1957 via the Treaty of Rome.
  4. Italy runs a sizable deficit in its current account as well as in its public finances.  Such is likely to exceed 3.0% of GDP this year and next, a slightly greater relative size that the U.S. current account shortfall.
  5. Italy has chronically weak economic growth.  Since the euro was launched at the start of 1999 with Italy as one of its eleven charter members, there have been just two calendar years when Italian GDP expanded as much as 2.0%.  Economic growth over the 14 years from 1999 to 2012 is likely to have averaged 0.7% per annum.
  6. Italy’s ancestral currency, the lira, left a poor legacy.  Such depreciated against the D-mark by 9.5% per annum between 1968 and 1978, 5.4% per annum from 1978 to 1988, and 2.9% per annum over its final ten years to 1998 after which the two currencies were joined at the hip in the euro.  Over all 30 years, the lira fell at a 6.0% annualized rate versus the mark.  If that pace had been allowed to persist, Italy’s currency would be 55% weaker now than at end-1998, and even if the lira had lost value at the slower 1988-98 pace, it would have dropped by a cumulative 32%.
  7. Italy lacks a tradition of effective, stable political leadership.  Twenty-six different men have led the government since Mussolini.  In three different tours at the helm of power totaling some eight years, Prime Minister Berlusconi, the current center-right prime minister, has been very disappointing, failing to deliver reforms and repeatedly making promises he didn’t keep.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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