For many, Italy has become the biggest threat to the entire Eurozone.
Why?
We’ll tell you all about it in this video.
The Cradle of the West, pasta, pizza, and popular coffee-making techniques like the
cappuccino, ristretto, and espresso.
But in addition to all that, Italy has become quite a headache for Europe’s leaders.
No wonder, we’re talking about a giant that could turn into a true Titanic.
An economic and financial crisis that could make Greece’s crisis look like child’s
play.
See, Italy currently has the eighth largest economy in the world...
But this country isn’t growing, its banking system has loads of problems and its government
is hugely indebted.
In fact, Italy’s public debt already surpasses 130% of its GDP, which means that even though
it has the fourth largest economy in the European Union after Germany, the United Kingdom, and
France, it also has the largest public debt stock.
Which amounts to more than 2.5 billion dollars.
The Italian public debt, folks, is twice the size of the entire Mexican economy and almost
4 times that of the Swiss economy.
And that, my friends, is a lot, and I mean a lot, of money.
But the problem doesn’t even begin to end there.
The Italian economy is hardly growing, in fact, it hasn’t managed to get back to its
pre-2008 crisis levels; unemployment surpasses 10%, and youth unemployment lies at around
40%.
To all this we need to add the fact that, year after year, public debt continues to
rise, and it won’t stop growing; the country has a very big population-aging problem and,
above all, the European Central Bank, which in recent years has been Italy’s largest
public debt purchaser, could soon stop:
("ECB says its massive bond-buying program will likely end in December”
All of that said, we can easily understand news like this:
("Italy is pushing Europe to the brink of another economic crisis".
("The Italian crisis that is making the EU tremble worsens”
Now, some of you may be wondering:
Hey Simon, the problems you're talking about aren’t precisely new, so, why is Italy in
the spotlight?
Why has it gone back to the front pages?
Why the hell should we suddenly be so worried?
Well, listen up.
(NEW GOVERNMENT: A STEP BACK)
After months of uncertainty, a new government finally gained power in June 2018.
And we’re not talking about just any government.
Led by the new Prime Minister Giuseppe Conte, we’re talking about a government formed
by the Eurosceptic and anti-system movement Five Stars, and by La Liga, an extremely far-right
wing party.
This new coalition arrived with a very clear idea in mind: Italy’s sovereignty would
again be in Rome and not in Brussels…
Which in most cases wouldn’t mean anything except a higher expenditure.
Well, the fact is that, as you know, the countries that belong to the Eurozone, that is, those
that share the same currency, agree on certain goals with the European authorities, as well
as on some maximum public deficit levels, and on a path that these deficits have to
follow over the years.
All of this is done to maintain their stability and solvency and thus reduce the risk of crisis.
Well, the new Italian government doesn’t like this one bit.
- Deficit path?
Come on.
Now you’re going to tell me how to spend or not spend my money?
Well you seem to have a very clear idea of what we should do.
This is, more or less, what the new government must’ve thought... because one of the first
things they did was present a budget proposal in September for a public deficit that is
substantially larger than the one they committed to in Brussels.
And that's when the earthquake happened.
( Italy defies the European Union and increases their deficit to 2.4% of the GDP.
- A new government wanting to spend more?
But Italy has a public debt problem.
And now they want to ask for a higher debt?
Seeing is believing.
Because, folks, 2.4% may sound low, but if we take the fact that the Italian economy
is forecasted to not grow more than 1% in the upcoming years into account, then things
change…
Because that 2.4% now means that with every year that passes, Italy will become less solvent--that
is, it’ll be even less able to pay its debts.
Well, do you know what came of this dialogue between the new Eurosceptic government and
Brussels?
Check it out.
Since Giuseppe Conte’s new government’s orientation was exposed, the 10-year Italian
bond’s profitability soared by more than 90%.
That is, investors now understand that there’s a very high risk and therefore require a higher
profitability for lending their money.
Obviously this means that every time that the Italian government issues debt, it has
to include higher interests.
This means that up to the year 2020, Italy will have to face debt maturities of almost
600 billion dollars, an amount that, of course, it’ll have to request again from the markets,
along with the deficits it has accumulated until then.
This amounts to more than 700 billion dollars.
- These numbers are insane, right?!
Well, if investors ask for more profitability, interest will be higher, and so will the public
deficit...
And if, in addition, the European Central Bank stops buying debt...
it could mean even higher interests... to the point that this spiral could put the Italian
government on the ropes, and then its banks, as they own a good part of Italy’s debt.
Also, it doesn't seem likely that they’ll be able to withstand a new recession.
"Italy’s Banks Stumble Into a New Crisis.
And of course, that’s not all.
Italy isn’t Greece, its huge size could mean the spread of their financial crisis
throughout the entire Eurozone.
That’s why the new Italian government’s policies have led to so much concern.
Italy is a time bomb that could explode at any moment.
That’s why it doesn’t seem likely that the European Central Bank will stop funding
the party.
"The only reason Italy isn’t already rated junk is because the rating agencies assume
the ECB will step in to prevent a default.
In that sense, Italian bonds are actually German bonds.
John Rubino
The question is, how long can this situation last?
But now that we know what’s happening, the question that remains is, how did they get
to this point?
Listen up.
(THE ORIGIN OF THE PROBLEM)
Not so long ago, we dedicated a video to how Italy arrived at this situation.
We can basically summarize it as a lack of competitiveness.
For years, Italian politicians really didn’t care about the economy.
While the world changed at full speed, Italy punished companies with extremely high taxes
and lots of regulations of all kinds.
And that’s not all.
The state kept hiring more and more officials and spending money without really caring about
the results.
For example, only 1 in 5 young Italians gets a university degree, a rate that’s almost
half the OECD average.
And of course, if you aren’t educating your youth and forget about being competitive,
what else can you expect?
If that weren’t enough, by adopting the euro, Italian politicians can no longer use
one of their favorite tricks: devaluing the currency.
So this, folks, this is what explains the dark news that we occasionally see in the
media.
As you can see, the situation is very complicated.
Here at VisualPolitik we’ll try to keep up with all the events.
But now it’s your turn: Do you think the Italian government should break with Brussels?
Leave your answer in the comments as well as the survey.
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