Italy’s Dramatic Debt Accumulation: Risks for the Eurozone

Berlin. Alarming news from Italy: debt is rising, the economy is weakening, tax revenue is falling. And in the midst of this Crisis scenarios the government is increasing the national deficit even further. The right-wing populist Prime Minister Giorgia Meloni wants to keep her expensive election promises and pour out the social cornucopia on the population.

According to the draft budget for 2024, there should be 24 billion euros for low earners, large families and civil servants. This would bring the national mountain of debt to a total of over three trillion euros grow.

The financial markets are already reacting nervously: “Italian government bonds are at risk of being downgraded Junk level“ is the wake-up call. The worse a country’s credit rating, the higher interest it has to pay to get money. As a result, the deficit continues to grow – a vicious circle.

The debt tsunami in Greece triggered violent turbulence in the eurozone

Haven’t we had this before? During the euro crisis in the years from 2010, the debt tsunami in Greece triggered severe turbulence in the community. Since many European banks had bought Greek government bonds, they had to use them as “bad loans” copy. This in turn tore deep holes in the financial institutions’ balance sheets. Loans to the state, companies and consumers only flowed sparsely. The result was a severe economic crisis. Consequence: The euro rescue package was introduced in 2012, which kept over-indebted member states afloat with loans and guarantees.

The Euro rescue package would also be deployed over Italy in an emergency. There is another reason why a horror scenario à la Greece should not be feared. The old phrase from the global financial crisis of 2008 applies: “too big to fail”. The Eurozone would not let Italy, the third strongest economy in the EU, go bankrupt. If necessary, the ECB would temporarily buy Italian government bonds as a crisis fire department. There is an additional risk buffer: a large part of the Italian government debt is held either by domestic banks or by the ECB. The risk of infection is therefore far lower than in the case of Greece.

Meloni and Macron are in favor of a more flexible interpretation of the debt rules

Nevertheless, the problems of Italian patients not to be taken lightly. Meloni and her predecessors have increased the debt burden through their lax fiscal policy. In times of cheap money, many expenses were paid for on credit.

Italy in particular benefits from the Eurozone’s strict debt rules at the beginning of the year Corona-Seuche were suspended. If the EU Commission has its way, the deficit limits should be interpreted more flexibly in the future. Meloni and French President Emmanuel Macron are behind this initiative. But a “laissez-faire” financial policy would be dangerous for Europe’s economy.

In times of mega-crises, Chancellor Scholz’s “double oomph” was justified

In times of mega-crises – Corona, energy, wars – it makes sense for the state to use billions in subsidies to prevent a serious economic downturn and ensure social balance. In this respect, Chancellor Olaf Scholz’s (SPD) “double oomph” was justified. But the exceptional situation must not become a permanent situation. The governments have to take the course fiscal virtue return and present balanced budgets. If the financial markets lose confidence, raising money on the capital market becomes expensive. The example of Italy and the latest “junk level” rumors prove this.