Italy Might Shake Off Crisis Without Having to Confront Economic Failings
(Bloomberg) -- Italy might just be succeeding yet again in shaking off a crisis without having to confront the failings of its economy.
The country, whose growth malaise looms most over the region, is set to become the biggest beneficiary of a European Union recovery plan that may form a blueprint for joint fiscal borrowing.
That, along with European Central Bank stimulus that’s pushing down sovereign bond yields, buys time for highly indebted Italy to contain its coronavirus pandemic, and to address the problem of weak growth in its own way, possibly at its own glacial pace.
The euro zone’s third-biggest economy has cruised through the 21st century enduring perennially feeble expansion, while brushing off periodic crises that might have galvanized its politicians into addressing the weaknesses underlying them. If that continues, those canceled dates with destiny risk testing the patience of its EU partners.
“There is some moral hazard involved in all this, and I don’t blame the frugal nations for wanting to be vigilant,” Rosamaria Bitetti, an economist and lecturer at Luiss University in Rome. “There is a feeling that a kind of ‘Romanization’ of EU fiscal policy is taking place.”
What that means, Bitetti says, is that Italy and other weaker euro members risk misspending the time and money, and put off hard decisions to enact growth-friendly measures.
Italian premier Giuseppe Conte hinted at that danger last week, saying EU aid will test “the strength and credibility not just of the government, but also of the Italian system.”
With those funds seen forthcoming, market pressure on Italy has lessened. Its 10-year yields fell to a two-month low last week, narrowing the spread with Germany’s equivalent. The yield on the benchmark Italian 10-year bond rose on Monday by one basis points to 1.42%.
“This could be a turning point for Italy,” said Patrick Krizan, an economist at Allianz SE in Munich. “It could finally tackle the necessary investments and structural reforms to increase its growth potential.”
If Italy doesn’t seize the moment, that would extend a narrative that has dominated its membership of the euro. Unlike Germany, the country didn’t take advantage of the calm early years of the century to revamp its economy with pro-growth measures.
More recently, repeated ECB stimulus salvos, engineered by -- Italian -- former President Mario Draghi, kept the economy afloat. But the opportunity to reform wasn’t fully grasped, despite his pleas for more.
In between, neither the global financial crisis, nor Europe’s sovereign debt turmoil, nor the region’s subsequent flirtation with deflation, ever alarmed the country’s political class enough to pursue the sort of therapy that could spark an economic miracle like the one it first experienced after World War II.
There’s no lack of suggestions from international observers on what to do. Both the EU Commission and the OECD have issued regular lists, which include reforms to improve public administration, tax collection, investment and education.
“The Italian people are the ones that suffer the must due to a lack of reforms,” said Karsten Junius, chief economist at Bank J. Safra Sarasin. “We shouldn’t forget that.”
|Rome’s ‘Going for Growth’ priorities in 2019 from the OECD|
Domestically however, the appetite to grapple with those problems has been fleeting, complicated by a fragmented political system and tortuous legislative processes.
Against that backdrop, the measured success of finance ministers in keeping Italy’s deficits in check has been noteworthy. But the economy’s dearth of growth in the past two decades -- particularly in the long-impoverished southern regions -- has still been debilitating to its fiscal prospects.
The cost of stimulus to offset the shuttering of its economy now looks likely to push debt above 155% of gross domestic product.
European partners are set to step in with budgetary aid as part of a recovery fund -- even though northern countries such as the Netherlands are reluctant to grant money without strings attached. In the meantime, ECB bond buying is helping to keep the country’s borrowing costs under control.
Even those crutches might not be enough, according to Scope Ratings, which warned this month that “long-run debt sustainability is a growing challenge.”
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While Italy has so far avoided the fate of countries such as Greece that were forced to accept bailouts on harsh terms during the sovereign debt crisis, its ability to do so in future might depend on what it does now.
“If a future populist government uses the EU rescue money for political giveaways, the frugal member states would see their concerns about moral hazard confirmed,” said Allianz’s Krizan. “They would probably no longer provide help in a future crisis.”
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