The Return Of The Euro Crisis

Written by insidesources

Anyone who thought that the Eurozone debt crisis was resolved has not been paying attention to economic and political developments in Italy, the Eurozone’s third-largest member country.

They have certainly not been focusing on how very vulnerable the Italian economy remains to a less favorable international economic environment and to more challenging global liquidity conditions than those that have prevailed over the past few years.

Julius_Silver / Pixabay

Nor have they been drawing the implications for economic policy from the recent Italian parliamentary election. That election saw a surge in support for populist political parties not known for their commitment to economic orthodoxy or to real economic reform. At a minimum, this is likely to usher in a prolonged period of Italian political uncertainty.

To say that the Italian economy is in a very poor state would be a gross understatement. Over the past decade, Italy has managed to experience a triple-dip economic recession that has left the level of its economy today 5 percent below its pre-2008 peak. Meanwhile, Italy’s current unemployment level is around double that of its northern neighbors, while its youth unemployment continues to exceed 25 percent.

The country’s sclerotic productivity performance has contributed to the persistence of major economic vulnerabilities. Those vulnerabilities could very well be exposed once the European Central Bank exits from its government bond buying program later this year that has been particularly supportive of the Italian bond market.

Not only has the country’s public debt to GDP ratio continued to rise to 133 percent, making the country the most indebted country in the Eurozone after Greece. Rather, its banking system remains clogged with non-performing loans that still amount to 15 percent of its balance sheet and that starve the economy of much needed credit.

As the economic sick man of Europe, Italy cannot afford a prolonged period of political instability and policy experimentation. Rather, it needs fundamental economic reforms that might close its productivity gap with its northern neighbors and that might put the country on a faster growth path. Only then will Italy have a chance to grow its way out of its public debt and banking system problems.