Mark Twain famously said, “The Creator made Italy by designs from Michelangelo”. However, the same cannot be claimed of the finances of this beautiful land. The country popular among tourists boasts of rich history, famous food, and romance. It is also one of the most visited countries in the world. Italy’s economy is driven by an educated, efficient, and hard-working labor force. It also possesses an impressive standard of living that has been achieved by being one of Europe’s biggest offenders of taking on debt. In fact, its national debt is beyond 100% of its GDP. This is what, inter alia, led to Italy being included in the infamous PIIGS crisis. In fact, at one point, Italy was called the ‘Sick Man of Europe’ because its economy was growing very slowly!
Like the other PIIGS nations, the cause of the problem in Italy was the sovereign debt i.e. the debt obtained from other nations using the lender’s currency. Its massive proportion created an enervated economy that would crumble in the face of a major shock. This shock was the 2008 financial crisis- the crisis that emerged following the bankruptcy of Lehman Brothers which was the fourth largest investment bank in the United States. It quickly spread to the entire world and globally became a financial and real estate sector crisis. The global financial crisis has influenced many countries in the world and caused various economic, political, and social problems in the European Union countries especially in Portugal, Italy, Ireland, Greece, and Spain (PIIGS).
However, it must be noted that sovereign debt, which is a form of external debt, is not a problem. It only becomes a problem when the country exhibits symptoms of an ailing economy. If the country’s economy is prosperous and flourishing, then there is low risk. However, the problem was that the PIIGS were Europe’s weakest links! These nations were the worst-hit financially and their abject economic condition threatened the entire continent, making the PIIGS crisis the center of the world’s attention. An unexpected blow proved to be the element that set the ball rolling.
Italy had actually been doing quite well in the course of the crisis, better than the average of the Eurozone, with a deficit to GDP of only 4.6% in 2010, which had even declined from 5.4% in 2009. Of course, commentators then blamed the Italians for having an outrageous debt to GDP ratio. However, it is worth noting that in 1995 this ratio was 121.5% against an average of 72.5% in the rest of the Eurozone (a good 49% above the average of the future Eurozone). Whereas by 2010 the difference between the Italian performance and the average of the Eurozone had actually decreased from 49% to 34%. In the decades preceding the 2009 crisis, Italy had managed to remain relatively fiscally disciplined. The primary surplus had consistently been above the euro area median level. After a major and politically costly correction in 2005–06, fiscal stability had been consolidated. The outstanding level of private savings and of private wealth (the highest in Europe relative to GDP) among Italian households was another factor in preserving fiscal stability. Italian accounts’ relative fiscal stability was also acknowledged by the European Commission, which predicted that the path of the debt to GDP ratio for Italy in 2060 to come in at a substantially lower level than those of Germany, France, and the United Kingdom.
In 1999, Italy joined the Eurozone. The member countries of the Eurozone enjoyed the benefits of using the euro. The principle rules required Eurozone members to ensure that government debt did not exceed 60% of GDP and that any budget deficit should not exceed 3% of GDP. Effectively the gloss of the good credit rating of countries such as Germany rubbed off on countries such as Portugal, Ireland, Italy, Greece, and Spain. They also enjoyed increased investment capital. This also pulled down the interest rate at which Italy borrowed and thus, encouraged Italy to spend more money. Unfortunately, while countries like Germany continued its tradition of investing in research and development and other productive purposes, the PIIGS used too much of the available credit to consume more, build generous social systems and fund a construction boom. As a result of the growth in consumption, many of the countries, now in trouble, built up a large balance of payment deficits that were clearly not sustainable. However, this excess consumption was tacitly encouraged by others as it helped demand and growth in their own economy.
The 2008 crisis resulted in a gargantuan dip in the revenues of the state since economic life was at a standstill. Many lost their jobs and productivity was severely impacted. During the recession, while tax revenues plummeted, public spending skyrocketed in order to pay for unemployment and other benefits. The marked downturn in the sales of domestically produced goods and services had significant effects on employment: on average, in 2009, the number of people in employment declined by 380,000 (-1.6% on an annual basis), while the unemployment rate rose to 7.8% (increased by 1% compared to 2008).
An interesting impact of this is also evident in the brain-drain that Italy, along with other European nations, experienced. There were efforts made to achieve ‘reverse brain-drain’. One of them includes the Italian parliament’s decision to expand its rientro dei cervelli (“return of the brains”) program in May of 2009. Under this, Italian nationals who relocated to Italy with a work contract and agreed to stay there for at least two years could secure a 70% break on their income tax for up to 10 years. The impact of Brexit cannot be ignored either. A vicious mixture of market volatility by Brexit, contentious performance of political leaders coupled with an ill-managed financial system exacerbated the state of Italian bankers in 2016. The non-performing loans amounted to about $360 million euros that year.
Importantly, it must always be remembered that the collapse of the Italian financial institutions will be much more devastating to the European Union’s economy, given that Italy’s economy is much larger than any of the other PIIGS nations. Thus, Italy continues to be a pressing concern for the European Union.