ITALY ECONOMY AND SUSTAINABILITY OF PUBLIC DEBT

The Italian economy is the world’s 8th largest economy in 2018 with 2.18 trillion dollars according to IMF data. The growth rate was 1.5% on average between 2004 and 2007 before the global financial crisis. The growth rate of the Italian economy was adversely affected by the financial crisis and shrank by 1.5% on average between 2008 and 2012.  In 2014, shrinkage was replaced by positive growth, and economic growth was positive in the following years. Growth expectations for 2018 and 2019 are estimated at 1.5% and 1.2%, respectively. The Italian economy has also achieved the positive momentum in its growth rate. Before the global financial crisis, the current account deficit was -1.0% as a percentage of GDP. The current account deficit increased with the global financial crisis, and the current account deficit between 2008 and 2012 was -2.3%. Nowadays, current account deficit has turned into current account surplus. In 2018 and 2019, current surpluses are expected to reach 2.5% and 2.3% of GDP (Table 1).

The global financial crisis and unsustainable high public debt led to the escape of short-term capital flow from Italy. TARGET2 system provided an opportunity for Italy to adjust its current account balance. Italy’s current account deficit dropped significantly after the crisis. Trade surplus ensured Italy’s current account surplus. Italy, which has a strong export performance, owes its success to high value-added exports. Machinery, industrial designs, furniture and textile are among the most significant trading products of Italy. Germany and France are among the most important trade partners. The decline in unit labor cost and the decrease in unemployment rate have also a positive effect on export performance. Italian economy is dependent on energy imports a country like Turkey. The volatility in energy prices has a negative impact on the current account balance of Italy.

Table 1. Economic Indicators in Italy

Source: Eurostat ve ECB.

Public debts in Italy are a major problem. Increasing public debt causes the fragility of the economy to continue. Between 2004 and 2007, public debt was 101.1% of the average GDP. Italy’s public debt is now more than 130% of GDP. Although 2018 and 2019 expectations are around 130%, it is still a high rate. Italy has not yet shown its success in achieving current surplus in reducing public debt. This makes public debt unsustainable. Moreover, lagging behind the targets in inflation and privatization neutralizes efforts to lower the debt. All this reduces the growth expectation. The Italian economy has entered a vicious cycle with high public debt.

Italian economy is dependent on developments in interest rates and European Central Bank monetary policies due to the public debt burden. For this reason, Italy’s national budget is very sensitive to the changes in interest rates. This situation reduces the sustainability of the debt burden. Similarly, the growth rate is affected by the developments in the economy and remains low. The low speed in economic growth is increasing concerns about higher debt burden. This situation may lead to the unwillingness of growth motivation of companies. In this respect, there is a need for rapid acceleration in growth. Moderate growth is good, but not enough for the sustainability of Italy’s debt burden. In addition, it is important that the structural reforms in the public sector continue to be implemented in a decisive way, otherwise in the following periods economic growth and export performance may decline and return to pre-crisis levels.