This is part 2 of my ‘Jesus Christ Italy, you ok hun?’ series. In part 1, Mama Mia, Here We Go Again, I talk about the current Italian political crisis and its recent history. Italy, you will be surprised to hear, is in a political crisis (I know, unprecedented). I say surprised because apparently no-one noticed that Italy has been in a crisis for the best part of 30 years.
Public debt in Italy is skyhigh and it’s a big problem. Why? Because the Italian economy is integrated with the economies of 18 other nations via the Eurozone and further still it is locked in common market with a whole host of other nations that make up the one of the largest economic blocs in the world, up there with the United States and the People’s Republic of China. The crisis today could therefore effectively bring down the European economy and by extension, potentially the global economy, and it is centred around the ‘monster’ as Italians like call it (Marro, 2018).
Or, is it?
The right-wing Neoliberal establishment haven’t exactly had a good track record of running the Western World in recent years, in the US, Europe, or anywhere else really and now we are supposed to believe them over this? I’m not so sure. What is the current public debt crisis about, and what is causing it? Well, let’s find out, shall we?
‘In short, private finance in northern states began flooding into the periphery states… saw consumption spike and house prices continually rise’
We should begin with the Eurozone itself. A single currency needs to have an effective unified economic state for it to effectively combat economic downturn by sharing risk responsibility, strengthening the no-bailout clause designed to undercut the moral hazard trade that led to the core economies over-lending (in a bid to drive up financial profits by leveraging high-risk debts against foundations of safe assets) and curbing excessive fiscal deficits (Blyth, 2013. Berger et al, 2018). All of which is only be feasible under a single fiscal union where countries and their people understand their responsibilities to one another. Otherwise, you end up with 19 different states operating within a system for their own national interest and therefore operating competitively both within the Eurozone and outside it rather than co-operatively.
‘It was a bank bailout, centred around protecting the wealthier core economies…’
This is what we saw in the aftermath of 2008. The financial sectors of periphery states were on the verge of collapse, while the states themselves were unable to bail out their own financial sectors because the avenues that were available to other states, such as the UK and US for example, were not available to periphery states who did not have their own currency. A contagion risk grew in the periphery states where the financial institutions of the core economies and non-Eurozone countries were at substantial risk of collapse themselves. This is because investors cutting losses in one periphery state banking sector would then have to rebalance their portfolios through all periphery states and eventually into the core states (Metiu, 2012). The result was numerous bank bailouts that effectively brought failing financial assets onto the public balance sheet in periphery states, protecting them from defaulting and enabling contagion risk to be reduced in the core states banking sectors that over-borrowed to the periphery economies in the first place (Blyth, 2013). It was a bank bailout, centred around protecting the wealthier core economies financial sectors who over-borrowed (the cause of the virus) rather than the periphery economies that over-spent (the symptom of the virus).
The constraints of the Eurozone’s fiscal rules made things worse, you had a system similar to that of the gold standard, where you cannot utilise inflation or devaluation to solve economic catastrophe because you lack control of your own national currency (Blyth, 2013). Such as how Italy growth in the 1970s was in part due to how the lira was devalued in the 1970s (Marro, 2018). In which the lack of control over their own currency means the Italians lost a large amount of policy space to stimulate and grow the economy or reduce their levels of debt. Along with a burden of a large-scale austerity program designed to bring about export price deflation in a system that is set up to be deflationary, it is no wonder Italy largely failed to recover and has seen debt balloon. Austerity and the bailout undercut the only avenue of economic investment in the economy at a time when the private sector was contracting. Simply, they were being forced to operate like Germany without the economic structure to make that evolution. (Guerrieri & Esposito, 2012). All while systematically attempting to bail out their banking sector which is effectively dead.
The result of which is that the Italian state goes against the economic policy dimensions set by the European Central Bank and the Eurozone’s fiscal rules in a bid to provide the economic stimulation that should be coming from the core Northern states and the European Central Bank. Because, whether they like it or not, they share the same bloody union and Italy’s decades-old problems aren’t going to be solved by putting the Italian state under the axe.
Bibliography
Berger, H. Dell’Ariccia, G. Obstfeld, M. (2018) Revisiting the Economic Case for Fiscal Unionin the Euro Area, International Monetary Fund.
Blyth, M (2013) Austerity: A History of a Dangerous Idea, New York: Oxford University Press
Guerrieri, P, Esposito, P (2012) Intra-European imbalances, adjustment, and growth in the eurozone,Oxford Review of Economic Policy, Vol 28(3), pp.532-550.
Marro, E (2018) Debito pubblico: come, quando eperché è esploso in Italia, Il Ore 24 Sole, Available at: https://www.ilsole24ore.com/art/finanza-e-mercati/2018-10-18/debito-pubblico-come-quando-e-perche-e-esploso-italia-172509.shtml?utm_medium=FBSole24Ore (Accessed on: 14th December, 2018).
Metiu, N (2012) Sovereign Risk Contagion in the Eurozone, Economic Letters, Vol 117(1), pp. 35-38.
mdxipe 