The Future of Italian Debt
The European Central Bank will stop stimulating Eurozone economies with its unconventional monetary policy aimed at injecting liquidity to increase inflationary pressure to avoid deflation. The controversial Quantitative Easing program, launched by President Mario Draghi in 2015 to stem disinflation, will officially end in September 2018, as a message to the markets that the financial crisis is now over.
To those unfamiliar with the subject, Quantitative Easing (QE) is an ultra-expansive monetary policy issued by central banks following strong recessions that make conventional policies inefficient, and it comprises purchases of government assets. Its deployment consists of the following steps. First of all, central bank issues cash through the purchase of bonds, financial assets, toxic assets, eventually rising their price and reducing their yield. Therefore, under the assumption that interbank rates are related to bonds’ performance, interest rates are reduced, hence getting more people to engage in borrowings and investments. In addition, lower interest rates on governmental bonds mean a higher confidence on their stability by international investors which makes easier for the government itself to repay interests on its sovereign debt.
Starting from this introduction, the future of Italian public finances remains uncertain. Italy has benefited from this program with a purchase of 300 billion Euros worth of bonds. QE had a positive impact on other several aspects. It removed toxic assets characterized by high risk prospects and low yields from the state coffers. It also improved the position of the Italian government as a borrower by allowing the state to stand out in treasury auctions, avoiding a financial default. However, Italy is facing an existential threat, which has its roots in the European sovereign debt crisis that blew up in 2009 and concerns, among the most affected, Greece, Spain and Cyprus as well.
Because of bad administration undertaken by the Italian establishment since the 1970s, Italy finds itself in a mine field. Its recovery and growth are too weak to face a possible speculative attack. Yes, many economic and political manoeuvres managed to improve the situation, but a radical change must be carried out by the upcoming government. And the results of the last turbulent elections don’t look promising. Unpopular choices must be taken, and they may result in a loss of consensus.
There is a need for tax reform, aimed at fostering corporate investments and resizing social injustice. A renewal of the banking system, deemed too risk averse and thus deteriorating the relationship with Italian small and medium-sized enterprises. Last but not least, the public administration, an inefficient, corrupted and giant money-grabbing machine needs profound reforms. Demagogic promises made by politicians during the last election campaign are only likely to increase public debt - and its ratio to GDP is already above 130%, a ticking time bomb.
The flat tax and the abolition of the Fornero law would undermine Italian finances and blow up its debt. The former one, while increasing potential employment in the short term, the implementation would put the national budget in further crisis. As for the much-detested Mario Monti’s reform, it saved the Italian pension system by raising the minimum retirement age according to the growing life expectations and current unemployment among the youngest; it was necessary and urgent. Given the 2,250 bln debt, the promises of a flat tax or the opportunity to enjoy an earlier retirement are not affordable, feasible or remotely rational. A fortiori, at the dawn of the QE end.
WRITTEN BY BENYAMIN B. HAKIMIAN FOR BESA
PLEASE DIRECT ANY INQUIRY TO AS.BESA @UNIBOCCONI.IT