Italy’s economic fundamentals are not encouraging. Over the last 30 years, the share of Italian exports in world exports has been halved, dropping from just over 5% to just 2.5%. In 20 years, the level of GDP per capita, which is in itself the best measure of a country’s economic performance, has fallen by 10%, while this measure of prosperity has increased by almost 20% in Germany.
Added to this is another major problem: depopulation and youth unemployment. The country’s total population began to decline in 2014. According to the United Nations, Italy’s population, currently 59 million, will reach 52.2 million in 2050, representing a loss of 11 .5%. The coming decline in the working-age population – those aged 25 to 64 – is even more worrying. According to projections, this segment of the population should fall by just under 30% over the same period. This means that the public debt accumulated in the past will be borne by a smaller number of workers. At 21%, the unemployment rate for 15–24 year olds is four times higher than in Germany. Poor labor market prospects are pushing large numbers of young people to emigrate.
A chain of crises
The crises are linked in Italy, so that the country has still not recovered its level of economic activity of 2008. After the economic recession of 2008 and the debt crisis of the euro zone of 2011, then that of the Covid 2020, Italians are now facing a cost of living crisis due to rising inflation. In Italy, the loss of purchasing power is among the highest of the countries in the euro zone. The latest figures reported inflation of 9.5%, while wages rose only 1.4%. Consequently, the purchasing power of Italians fell by 8.1% over one year.
In other words, the recession that is looming in Italy will probably be much more severe than elsewhere if measures are not taken quickly to limit the rise in the cost of energy at European level. Not to mention that nearly half of the approximately 2.8 trillion in public debt matures before the end of 2026. This debt will therefore have to be refinanced at less favorable interest rates. Last year, interest payments on the public debt accounted for around 10% of the Italian state’s total expenditure. This part of government spending will undeniably increase, which risks restricting Italy’s fiscal room for manoeuvre.
Market questions
At some point, Italy will once again be faced with market questions about the country’s ability to honor its debt. When the mistrust of the markets will be such that yields on Italian debt will become unsustainable, a political decision will have to be found. There are several solutions to avoid a default, a debt rescheduling or worse, an exit from the euro zone of Italy.
One of them consists of pooling part of the Italian debt at the level of the euro zone. The problem is that this subject is politically sensitive in the countries of the North. Another solution would be the activation of an unlimited purchase plan by the European Central Bank, which could only come from a political compromise between the Italian government and the European Commission. It is indeed difficult to imagine an action by the ECB if an excessive deficit procedure is launched by the European Commission against Italy and if the public debt is deemed unsustainable in the long term.
This second solution seems to be the most likely, but unfortunately, it will probably take another moment of bond market mistrust before this ECB purchase mechanism is triggered. While massive central bank purchases can alleviate short-term pain, fundamentally the only long-term way to make public debt sustainable in an environment of rising interest rates and economic growth low is to make more efforts from a budgetary point of view. A reality difficult to hear for any political party in power!