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Italy's Prolonged Recession Could Harm Fiscal Balances

BySober Look
Published 08/14/2012, 05:30 AM
Updated 07/09/2023, 06:31 AM

Italy's deep recession is now a year old and the economy shows no signs of improvement. But it's important to point out that unlike Spain, Italy's main problem for now is growth (exacerbated by poor competitiveness), not fiscal balance.

Growth:
Relative GDP growth
Fiscal Balance (better than the Eurozone and the US):
fiscal balance
Of course if the recession deepens even further and lasts considerably longer, the fiscal situation could worsen. There are signs this may already be taking place.

Reuters: - Finance Minister Vittorio Grilli said Italy's government would overshoot its 2012 deficit goal because of worse-than-expected growth but planned no extra budget cuts because Italy was on target to meet its EU obligations, a newspaper reported.

"We know there will be a worsening of the nominal deficit," Grilli told Rome's la Repubblica in an article published on Sunday. "Nonetheless, our compass remains the structural deficit, and on that we are and we will be perfectly in line."

... "When this recession is over, (the debt reduction plan) would permit a lowering in the debt-to-GDP ratio of 20 percentage points in five years," he said.

This is particularly dangerous because of the size of Italy's debt (some €2 trillion). If bond yields spike again, interest expenses alone could worsen the fiscal situation considerably. As discussed earlier, time is not on Monti's side - as he desperately tries to cap Italy's cost of funds via the ESM/ECB.

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