Italy bites the hand that feeds it

On Wall Street, it is said of the golden rule that the one who has the gold rules.

Evidently, Italy’s populist government does not agree with that rule. Otherwise it would not be going out of its way as it now seems to be doing to pursue policies that are bound to antagonize both its European partners and the United States.

In the event of another Italian economic and financial market crisis, Italy might need to call on those economic partners for major financial support.

ADVERTISEMENT

One way in which Italy has been antagonizing its European partners has been to pick a fight with them over its budget. It has done so by insisting that it will go ahead with the introduction of a basic income support and the reduction of taxes even though those measures might cause the country’s budget deficit to balloon.

More recently, as the Italian economy has slipped into recession, the Italian government is considering additional fiscal measures to stimulate the economy.

It is doing so even though this is all too likely to put the country on a collision course with Brussels by ensuring that Italy’s budget deficit exceeds the 3 percent of GDP deficit limit for eurozone member countries.

Italy is also flouting the eurozone budget rules at a time that Germany is responding to its economic slowdown by cutting back its public spending.

Not satisfied with fighting Brussels over its budget, the Italian government now seems to be setting itself up for a major foreign policy row with both Europe and the United States. It is doing so by rolling out the red carpet to Chinese President Xi Jinping and by indicating its intention to be the first large economy to participate in China’s Belt and Road Initiative.

Nevermind that both Europe and the United States have made it abundantly clear that they view China and its Belt and Road Initiative as strategic economic threats.

Nevermind, too, that Italy is now choosing to cozy up to China just as the Trump administration is weighing whether or not to impose punitive import tariffs on European automobiles.

The Italian government’s poking its finger in the eyes of both Europe and the United States might have been understandable were the Italian economy strong and healthy. However, there are too many indications that the Italian economy is weak and vulnerable to another round of the Italian sovereign debt crisis.

As if to underline this weakness, for the third time in the past decade, the Italian economy has again succumbed to an economic recession. This leaves Italian per-capita income at levels below those that prevailed in 1999 when Italy joined the euro. 

Since Italy’s sovereign debt crisis in 2012, Italy’s public-debt-to-GDP ratio has climbed to new heights. Indeed, after Greece, Italy is now the eurozone’s second-most indebted country.

At the same time, the Italian banking system remains characterized by a high level of non-performing loans and by an inordinate amount of public debt on its balance sheet.

With Italy having entered yet another economic recession and with it being stuck in a euro straitjacket, it is difficult to see how Italy will be able to grow its way out of its public debt and banking sector problems.

This makes it likely that sooner or later Italy will succumb to another round of its sovereign debt crisis, which could put Italy in a position where it will need major international financial support.

Before continuing to provoke its economic partners by pursuing policies that those partners so clearly oppose, the Italian government should be asking itself one question: Is this really the right time to be biting the hand of those countries that it might need to call on for help in the event of the next Italian financial crisis?

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund's Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney