Italy Could Be The Source Of The Next Euro Crisis

The economic health of Italy has become a cause of concern for European economists as well as other members of the European Union because many see the next euro zone crisis potentially originating from the country.

Currently the debt to annual income of Italy stands at 130 per cent as the country reels under the pressure of a huge debt of more than £2 trillion. This huge debt had been accumulated by the successive Italian government over years.

Italy’s national debt is currently the third largest in the world and had been acquired by a spending binge in the 1970s and 1980s among a host of other factors. The debt to income ratio of the country is way over the mandatory level set for its member countries – a rule that the EU members have to follow with respect to the amount of debt that they can take in.

Currently, the populist Italian government is also on a collision course with the European Commission because of its intent to reduce taxation and spend more on social causes which would result in large budget deficits. While not imposing any fine on Rome presently for violation of fiscal deficit, Brussels has urged Italy to find out ways ot cut down its spending plans.

The Italian government’s debt was too high and needed tackling, conceded the governor of the Bank of Italy – Ignazio Visco, in an interview with the BBC.

“There is uncertainty now on how to deal with it. And the markets are making us pay for that,” Visco admitted.

Bringing in reforms to taxations polices or cutting down on spending are the two major ways to reducing public debt of governments. However many argue that implementing both the methods would be tough in Italy because wage rise in the country in recent years has not been commensurate with the cost of living.

However, given the integrated nature of the economic set up of the EU where the economic fate of one is closely linked to another, it would not be possible for Brussels to keep on allowing Rome to increase its budget deficit beyond the set limit.

A large part of the debt of Italy is held by banks – most of which are Italian. But banks outside of the country and within Europe also hold significant part of the national debt of Italy.

The cost of borrowing for the Italian government has already increased because of concerns about its financial position.

In case of a complete breakdown in the confidence on the credibility of Italy could adversely affect the banks as well the ability of the banks to lend money to business and individuals right across Europe.

“We are in a moment in which the European design certainly is not at its height. So there are tensions, there are strong tensions, and each country has its own tensions,” said Visco while acknowledging that the system is problematic.

He however sounded confidence about the capacity of the country to deal with the issue.

“It is a country which has somehow proved that it can put its act together,” it said.

(Adapted from BBC.com)



Categories: Economy & Finance, Regulations & Legal, Strategy, Sustainability, Uncategorized

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