September 22, 2023

News Analysis: With 1% Growth and Staggering Debt, Italy Might Have to Cut Its Vacation Short

On Friday, Mr. Berlusconi, a born salesman who seems constitutionally unable to deliver bad news, gave a surprise news conference with his finance minister, Giulio Tremonti, to say the government would speed up the pace of reforms, among other things aiming to balance its budget by 2013, not 2014 as planned in an austerity package approved by Parliament last month.

Many analysts doubt the government will be able to achieve a balanced budget by then, but even that may not be enough to head off an eventual solvency crisis. Last week, Italy’s borrowing rates spiked to a record 6 percent on a debt that is 120 percent of gross domestic product, the second-highest in Europe, after Greece.

If rates stay that high, it could add unbearable strains to a country that is expected to have to refinance nearly $500 billion in 2012, one of the highest amounts in the euro zone and the equivalent of 20 percent of Italy’s G.D.P.

“The situation is getting clearly worse,” said Tito Boeri, an economics professor at Bocconi University in Milan. “Markets have always perceived the risk in Italy as more a problem of slow growth than a problem of solvency, but for a country with a debt the size of Italian debt, the boundary between a liquidity and a solvency crisis is very difficult.”

There are some bright spots. A study by the Italian bank UniCredit last week said that it expected Italy to issue $110 billion in bonds by year’s end, but that the country’s cash position was still “very favorable.” “Even with the currently volatile market conditions,” Italy would end the year with $65 to $70 billion in cash, the bank said, giving the Finance Ministry “sufficient room to counterbalance a reduction in foreign demand.”

The International Monetary Fund says 75 percent of Italian debt is long-term and therefore fairly stable. The nation’s budget deficit, at 4.6 percent of gross domestic product in 2010, is below the European average. Unlike Spain or Ireland, it never had a housing bubble, and unlike Greece and Portugal, it has a strong manufacturing sector and is Europe’s second-largest exporter, after Germany.

But markets are looking for weak links in the euro zone. “When the sharks scent blood they will keep nibbling at potential victims to see if they can be turned into full meals,” said Iain Begg, an economist at the London School of Economics and an expert in European monetary policy.

Italy’s greatest weakness is its faltering growth rate. Real G.D.P. is expected to grow by 1 percent in 2011 and 1.3 percent in 2012, according to Eurostat, not nearly enough to put a dent in its overall debt.

Small businesses with fewer than 15 employees make up the bulk of Italy’s economy. But because of an entrenched bureaucracy that strangles growth — and, economists say, some businesses’ tendency to favor family control over competitive edge — even when the world economy was booming, Italy’s was not. (In 1998, when the United States economy grew 4.4 percent, Italy’s grew 1.4 percent, compared with a European average of 3 percent.)

There are other worrisome figures. Italy currently spends 14 percent of its G.D.P. on pensions. Although its unemployment rate is 8 percent, lower than the European average of 9.9 percent, its employment rate is among Europe’s lowest — at 61 percent for men and 50 percent for women, compared to a European Union average of 75 percent for men and 62 percent for women.

Youth unemployment is around 27 percent, and a full two million young people are in a kind of limbo, neither working nor studying.

In light of this, some say the austerity measures of tax increases and co-payments on health care will only make things worse. “It’s not enough to get the deficit to zero, it’s how you get there that is important,” said Mario Baldassarri, a former Italian deputy finance minister and head of the Senate Finance Committee who was elected with Mr. Berlusconi’s party but broke with him last year.

He said that rather than raise taxes, which dampen growth, the government should have opted to make significant cuts to current government expenditures. “This has to be done now, there is no time to wait,” Mr. Baldassarri said. “Until now the government has acted like a dog chewing its tail and we cannot be that anymore, and that is what the financial markets are telling Italy.”

On Thursday, Italy’s business leaders and often recalcitrant labor union leaders met with the prime minister and said they were willing to start work immediately on reforms. “We cannot allow ourselves to stay in neutral and at the mercy of the markets until September,” they said in a joint statement.

Despite the dizzying descent in the bond markets, many here say members of Parliament have yet to grasp the gravity of the crisis.

“To speak about the most serious crisis in the past 20 years in front of M.P.’s with their suitcases packed, more concentrated on their vacations than on servicing the public debt, gives the image of a political class that is blissfully ignorant,” the commentator Stefano Feltri wrote in the left-wing daily Il Fatto Quotidiano on Friday.

At a news conference on Thursday, Mr. Berlusconi struck a Hooverian pose, saying he did not expect more market turmoil ahead and urged Italians to put their money into Italian bonds. But the new austerity measures include a higher tax on the special accounts required to trade bonds in Italy. “At a time where we want Italians to buy more government bonds, that’s a silly idea,” said Mr. Boeri.

Mr. Berlusconi also urged Italians to buy shares in his companies, which include Italy’s largest private broadcaster, Mediaset. “I brought a company public and if I had significant savings, I would invest in my businesses, which continue to give economic results,” he said with a smile.

Elisabetta Povoledo and Gaia Pianigiani contributed reporting.

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