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There Is No Way For Italy to Manage its Debt

Italy, which is one of Europe’s biggest economies and a member of the Eurozone, is about to be engulfed in a debt crisis, with no apparent way out.

Normally the European Union would be focused on trying to fix the current problems in the Italian economy in order to help stabilize it. However, Europe is currently spending much of its time and resources to resolving Brexit. Therefore, the Italian crisis is being mostly ignored.

The Italian Government

The Italian government is ready to blame Europe for the crisis, and part of their plan is to tell voters that they aren’t looking to leave the Eurozone. However, the Eurozone is pushing Italy out. It is possible that Italy will leave the EU while blaming the Eurocrats for the situation, as they were unwilling to address their financial situation.

Effect On The Global Economy

When a debt crisis hits Italy, it is almost guaranteed to affect the EU as well as financial markets worldwide.

According to some seasoned financial experts, the current debt crisis that is about to hit Italy looks the same as the Greek crisis, which hit nearly a decade ago. But this time, the impact would be greater as Italy’s economy is about 10 times bigger than Greece's economy.

The Italian Debt Crisis

The projected financial crisis that is about to hit Italy is due to the country’s ever-increasing debt to GDP ratio. In fact, in 2018 this number reached 132%, which is disastrous. This ratio is projected to reach 140% by 2020, as the IMF has predicted in its recently published research.

When we take a brief look at the history of the Italian economy, we can see that the last two times the country defaulted on external debt was after WWI and in 1940. Right now, Italy is fourth worldwide in terms of its external debt ratio, right behind the US, Japan, and China. But these countries are able to manage their debt more wisely. Unfortunately, Italy can’t simply step out of this debt crisis without hurting other economies, mostly due to its relationship with the EU and the Euro.

What Are The Options For Italy?

Just like all the other countries weighed down in external debt, Italy too has three options. Here is a brief look at all three of them.

First Option

Generally, counties with external debt can easily get out of their debt by accelerating their economic growth up to a level that allows them to generate revenue and pay off their debt. For Italy, this is nearly impossible to achieve. The average speed of economic growth in Italy has been just under 0.4% since 1999, with the economy expanding at a rate of 1.5% per year since then. This was when all of the world’s economies were experiencing rapid growth.

For Italy to get out of their external debt dilemma, the country would have to grow its economy at a pace of 0.7% per year, while maintaining overall growth at 1.3% per annum or greater. Growing this fast is almost impossible for Italy. For now, this is not a viable option.

Second Option

The second option for the government could be saving more, and generating more revenue to avoid taking additional bailouts, while paying the current debt back slowly over time to get out of this cycle. This is also unlikely to work for Italy.

Third Option

The third and the most obvious option for Italy is to create more inflation and use inflation to start paying back debts. But unfortunately, because Italy is still a part of the Eurozone, they can’t control inflation. And the ECB won’t allow it either. At the moment, there appears to be no way to mitigate this impending crisis for Italy.