Thursday, October 18, 2018

Will the Looming Italian Financial Crisis Spread to the Rest of the World?

Washington Post columnist Robert J. Samuelson explains the current dire straits of the Italian government financial situation:
What is clear is that the new Italian government is flirting with trouble. All the ingredients of a crisis are present.


(1) Italy’s sovereign debt — that is, its governmental debt — is already massive. It’s estimated at 131 percent of the country’s economy (Gross Domestic Product), the second highest among countries in the eurozone. The highest is Greece (nearly 180 percent of GDP), but Italy’s is more worrisome, because its economy is the third largest in the eurozone, behind Germany’s and France’s. Italy’s economy is roughly 10 times the size of Greece’s, says economist Desmond Lachman of the American Enterprise Institute. Whatever happens, the impact on Europe’s economy and financial markets will dwarf the repercussions of the Greek crisis.

(2) Italy’s economic growth is almost nonexistent. Since 2010, it has averaged less than 0.2 percent annually, reports the International Monetary Fund. This is important. If countries are growing rapidly, borrowers can repay their loans more easily, because their incomes — wages, salaries, profits — are also growing rapidly. Virtually all advanced countries have experienced economic slowdowns. But Italy is an extreme case. The fact that its growth is near a standstill means the country is highly vulnerable to anything that raises its debt or reduces its growth.

(3) Italy’s new government proposes expanding its budget deficit, from 0.8 percent of GDP — what the previous government proposed — to 2.4 percent of GDP. There’s a collision between what financial markets want (lower deficits) and what Italy’s government wants (new policies to satisfy its supporters). The coalition government consists of the populist-left Five Star party and the populist-right League Party. They are committed to a guaranteed “universal basic income” for the unemployed, tax cuts and a rollback of increases in the retirement age.

At the least, Italy and the European Commission, the Brussels-based bureaucracy that oversees the European Union’s laws and regulations, seem destined to collide, because the proposed 2019 budget violates European Union rules calling for much lower debt levels. The question is whether the dispute ends in an acceptable compromise or triggers a major confrontation.
And here is Samuelson with the big question:
 Italy’s debt has become an economic and political monster. What’s ultimately at stake is whether the monster can be controlled inside of Italy or whether it breaks out, spreading havoc across global economies and financial markets.
It does appear that U.S. banks do not have significant direct exposure to Italian government debt, so it would have to be quite a bit of  Rube Goldberg-type series of events to trigger a crisis in the U.S. because of an Italian financial crisis.

It can't be ruled out, but not likely.

I hasten to add that there are plenty of domestic threats the U.S. economy faces, from exploding government debt spending, to higher interest rates, to accelerating price inflation.

The walk in the park is just about over for the U.S. economy but Italy doesn't seem to be the epicenter that will cause troubles here in the U.S.


1 comment:

  1. Sometimes even statists get it right:

    "Socialist governments traditionally do make a financial mess. They always run out of other people’s money."

    --Margaret Thatcher