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|Be careful, Italy, or risk your credibility|
La Stampa - July 10th 2011
During the past two years of writing and talking a lot about
The panic in financial markets on Friday, with Italian shares being sold off and government borrowing costs rising, reflected exactly this sentiment. Just as for Portugal, Spain and Greece, economic growth in Italy is weak, with the country´s GDP and even manufacturing output recovering more slowly from the 2008-09 global crisis than has been the case in France, Germany or the Netherlands. But at least the country´s public finances were under control, with the budget deficit small and the ratio between public debt and GDP stabilised.
So, unlike in
A rise in the interest rates charged by bond investors, or a sudden rise in public spending or fall in tax revenues can turn a country quickly into crisis, especially when it has public debts that amount to 120% of GDP. (By the way, the public debts of
Alternatively, a crisis can suddenly happen when doubts arise about the future conduct of government policy, as a result of political instability, because those doubts are therefore also about whether spending and taxes are going to be controlled properly.
Previously during the economic crisis and slow recovery, fears about political instability and the financial markets seemed to help the government of Silvio Berlusconi. Whatever you may think of us, the government was able to say, you would be taking a big risk if you chose to change governments or force elections in this situation. Yet now, the battles inside the government have become far more destabilising than battles between the government and its critics. If this war continues, the more stable option would be to have early elections or a change of government.
The fiscal measures proposed by the minister of the economy, Giulio Tremonti, were accepted by the markets, but analysts both inside and outside the country noted one important feature of them: the main reductions in the budget deficit will take place far into the future. This is important now that the political battle between the President of the Council and the Economy Minister has come out into the open. For the inevitable conclusion that market analysts will draw is that the later cuts will never in fact happen. The credibility of the fiscal measures is crumbling.
Think about it from an outside observer´s point of view. On one day, the President of the Council declares that he has always been opposed to the war in
This is suicidal, from a national point of view. Credibility is being destroyed. The strongest aspect of the country´s economic policies, namely tight management of the budget deficit, is being put into serious doubt. If this goes on,