The Rome syndrome

The Italians were, for centuries, Europe’s bankers. The Medici’s, for their part, lent extensively to the British and French crowns. Let us not forgetthe marriage – of convenience – between Henry IV and Marie de Medicis, who was also known as “the fat banker’s daughter”. What happened in the second half of the 20^th century to put Italy in a disastrous situation? There was a drastic change of fortunes that saw this country’s public debt shoot up from 36% of GDP at the end of the 1960s to reach 120% at the start of the 1990s!

In fact, Italy’s budget deficit was almost always higher than 10% of GDP over this period, marked by a spectacular take-off in expenditure that was not offset in any way by an increase in fiscal revenues. And this was at a time when the servicing of this debt was already quite substantial, with interest rates far from negative levels… However, this borrowing and spending frenzy did not by any means turn into a qualitative recovery of this endemically-fragile economic growth, that led to a great tumult, being the financial crisis of 2007-08 which saw Italy’s public debt worsen to 130% of GDP.

It’s obviously not the government that’s been in power since June 2018 that will reverse the trend because, in fact, it is working meticulously to make it worse, right up to the point of no return that seems to be getting closer every day. After having flirted with the very practical and completely demagogical idea of leaving the euro, it concocted a plan to significantly reduce taxes and subsidisations of all kinds and to bring down the age of retirement…and was immediately sanctioned by the financial markets that propelled the yield on Italian debt over ten years to above 3.5% to levels unseen for 5 years after the height of the sovereign debt crisis. In the end, despite the downsizing of the current Italian executive, whose budget was rejected by the European Commission, this country is now funding itself at higher prices than Spain and Portugal are when, historically, it had always enjoyed better financial conditions of its public debt than these two countries.

Today, anything is possible in an Italy that has officially entered recession as of the second quarter of 2018: a new and intensely febrile outbreak of its sovereign debt, and a major crisis of its banking system that’s accumulating astronomical amounts of national debt and that will become notoriously and dangerously undercapitalised in the event of an interest rate hike. Unless certain Italian banks decide – to save themselves – to dump some of their assets, thus plunging the economy into peril with the obvious risk of worsening the depression. Some people, in the current coalition, are hoping for an intervention from the European Central Bank, forced to appease the markets given the size and significance of the Italian economy. In fact, the populists in power are purely and simply trying to take the central bank hostage.

Whatever the case may be, and even in the best of worlds, Italy’s public debt is already hijacking Europe’s agenda and structurally impacting the eurozone because it prevents the building of resilience against financial crashes. If only in principle, can you imagine for an instant certain nations allowing the gloomy idea of debt mutualisation to see the light of day in such fraught circumstances? The European Union is therefore condemned to remain incomplete and to continue showing its fragilities – and therefore to displease the overwhelming majority – so long as it supports such imbalances, because nothing can be done efficiently, convincingly or durably so long as Europe’s debts are not mutualised!

Italy’s leaders are indeed perfectly aware of the instrument they have at their disposal and that they are obviously not scared of exploiting. The result: Italy’s extreme vulnerability is now a weapon that they won’t hesitate to use against the Union that will panic and make concessions, and rightfully so, because the 2,400 billion euros of Italy’s public debt is far exceeding the size of its economy. All roads therefore lead to Rome, except that this country’s descent into hell is threatening the stability – and even the very existence – of the euro.