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The Italian economy at a standstill and heavily indebted

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In Brussels, Paris, Frankfurt, the show haunts the minds for months. That of a crisis of the euro zone, triggered by the turpitudes of the Italian political life. And especially by the country's large public debt, which exceeded 134% of gross domestic product (GDP) in the first quarter, according to Eurostat. In absolute terms, it is the highest in the currency union (2,350 billion euros), far ahead of that of Greece (337 billion). "In the extreme case where Italy is going bankrupt, no one knows if the firewalls created in the currency union after the 2008 crisis will be enough to avoid contagion, summarizes a European source.

If we are not there, the bursting of the populist coalition in power since June 2018 has, on Thursday August 8th, rekindled the fears. In the wake of statements by Matteo Salvini, a strong man of the government who called on "Go straight to Parliament"the "spread" (the gap between Italian and German ten-year sovereign yields) jumped from 200 to 230 basis points. Considered as the barometer of risk in the markets, it is still far from the symbolic bar of 300 points, crossed in October during the tensions between Rome and Brussels around the budget. But, in the coming days, it will be followed closely by investors, while European stock markets are just recovering from the plunge triggered early August by the resurgence of trade tensions between Beijing and Washington.

Growth in neutral

Worries will now focus on the political calendar – the possible holding of early elections and the possible composition of a technical government – then on the burning question of the budget for 2020. This was to be presented by the coalition between the League (far right) and the 5-star movement (anti-system) at the European Commission in September, and the negotiations were stormy. "To keep the target of 2% of 2020 public deficit set with Brussels, it is missing more than 20 billion euros: the government has never said how it was to find them", explains Nicola Nobile at Oxford Economics in Milan.

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If this delicate budgetary equation is not held – no matter who is in power who will present it – the VAT has to increase automatically in theory. 1st January, to bail out the public funds of 23 billion euros additional. A measure that the coalition had promised not to implement. "All the trouble is that such an increase would cut household consumption by at least 0.5 percentage points, and GDP by 0.3 percentage points", calculates Mr. Nobile.