Why was Rome so self-destructive
Rome's self-destructive generosity
Italy is not Greece. That is clear to everyone involved. The heads of government and finance ministers in the EU who have to grapple with the fact that one has to argue with a country about budget targets. And the populist government in Rome, which knows very well that its threat potential as a systemically important country is vastly greater than that in Athens. A euro zone without Greece, that would have been accepted. But a monetary union without Italy sounds like a big risk in view of the third largest economy in the euro zone and 2,300 billion euros in national debt. The banking systems of France or Germany (and Austria) are too closely connected to Italy. The government uses this threatening scenario in a negotiation game with the EU in order to obtain exceptions from the EU fiscal rules.
Just six months after the right and left populist government of the Lega and the Five Star Movement took over, it is clear that this strategy is highly risky for Italy itself. Because the general economic conditions are anything but encouraging. Not only is the country sitting on a mountain of debt that accounts for 130 percent of its economic output. The economy has been left behind for decades. Italy is not only a victim of the great financial crisis, but also of persistent productivity weakness. It has now reached an impressive level. Since 1995 the country has grown more slowly than all other countries in the euro zone, even Greece grew faster. Since 1995 the economic development has been indistinguishable from stagnation, even though the population of Italy is two million larger today. Labor productivity has stagnated for decades, which has contributed to the fact that economists have long spoken of the "Italian disease" when analyzing chronic growth weakness.
"Zombification" of the corporate sector
The reasons for this are deep. They begin with the increasing "zombification" of the corporate sector, when actually insolvent companies are artificially kept alive by banks and thus tie up skilled workers and capital to themselves and their less productive activities. They go beyond the insufficient investment in digitization and automation, which has gnawed at competitiveness and left Italy's economy behind online. And it ends with a state that is neither good at investing nor spending money and which, in an international comparison with other industrialized countries, is one of the inefficient, untrustworthy and most corrupt countries.
So the Italian disease has a number of causes, and a few tenths of a percentage point more or less new debt is definitely not an effective medicine for it. On the contrary: What the left and right-wing populist government is currently trying out has the potential to significantly weaken the health of the Italian patient. Because instead of fighting the causes, the fresh money should primarily be spent on alleviating symptoms. Measures such as early retirement, a kind of unconditional basic income and a flat tax for small companies are not only expensive with around 35 billion euros in new debt, they also do nothing to change the chronic weak growth. And for this, a lot of china is smashed, the EU Commission and partners insulted and the uncertainty in the financial markets is fueled.
A dent in growth
And the government is even jeopardizing that little bit of growth that recently brought the economy to the ground. After the politically turbulent months in the turmoil over the budget plan, a dip in growth is emerging that is likely to be even deeper in Italy than in other European countries. Because the higher interest rates for government bonds are slowly but surely making corporate loans more expensive and thus contributing to reluctance to invest. What Italy is currently experiencing economically is a "self-destructive generosity", as outlined by former IMF chief economist Olivier Blanchard. Because Italy's higher budget deficit - intended to stimulate the economy - led to higher interest rates on the financial markets. Because Italy's debt is so high, the higher interest rates are putting a noticeable strain on the economy. The effects of higher interest rates in Italy weigh so heavily in view of the debt burden that opening the state treasury would have to benefit really very effective investment programs in order to have a positive growth effect. So the bottom line is that the Italian reform program will do more harm than good and will ultimately leave behind an even higher mountain of debt.
None of these are particularly positive prospects for Austria. Italy is after all the third largest trading partner after Germany and the USA and a persistent growth weakness would quickly be reflected in Austrian exports. "We're not afraid. Italy's economy is solid," said Deputy Prime Minister Matteo Salvini in September. In view of the deteriorating economic situation, the second sentence is no longer true and it remains to be hoped that the supposed perseverance in Rome will soon fade away. If the government is not concerned with strengthening Italy's economy in the long term and leading it onto a new growth path, but only with confronting the confrontation, then Italy could really become a second Greece. (Lukas Sustala, December 11th, 2018)
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