I think this interview in the Italian newspaper Corriere Della Sera with the Italian economics/finance minister Giovanni Tria is good. And I want to point it out as an example of how people running the show there think about their fiscal choices.
Luckily the paper has done the translating for us. Below are the answers I want to highlight and why I think they matter.
Italy as a country with strong economic fundamentals
«The situation in international markets is complex in general. There is an increase in the price of risk and volatility everywhere. Against this background it’s normal that there may be apprehensions in a moment of stark political change in Italy. But the fundamentals of our economy are fine».
This is Tria’s attempt to not do what Erdogan has done in Turkey and blame markets for attacking his country. When countries have done that in the past, it has only made market alarm worse. Instead Tria says he understands the market worries about political change and implicitly sends a message that markets will calm down once they see that the “fundamentals of our economy are fine.”
Italy as the paragon of fiscal virtue
Pressed on that issue, Tria then says this:
«Let’s stick to the facts. At any point in time over the past 25 years, Italy has had a primary surplus (before paying interest) among the highest in Europe. We can’t be accused of adventurous budget policies. We’re carrying a debt that comes from a long time ago, of course. But now we have a net international investment position almost in balance, almost as many claims as debts, and at this rate we will be net creditors in the rest of the world in a few years. We have a significant current account surplus. Are those objective elements for a financial crisis? I would say no. I explain this phase with the normal questions that accompany a political transition».
For me, this is the most revealing part of the interview. It shows how the Italian government thinks about their predicament. And it also gives a broad highlight of what the fiscal picture in Italy looks like.
There’s a website called “Invest in Italy” that touts the primary surplus figures and shows what they look like relative to other EU countries. Here’s the chart.
This chart is supposed to show Italy as the undeniable stalwart of fiscal probity over the last 20 years, even compared to Germany. If you trace the German line from 1996, you see it closing a massive primary fiscal deficit in the run-up to the euro. It was only toward the middle of last decade though that Germany began to track Italy in terms of fiscal surpluses.
In Germany, policy makers frame the same analysis from a position of regret regarding Germany and France’s flouting the EU stability and growth pact in the mid-2000s under Schroeder and Chirac. Many policymakers see that as the original sin that led to the European sovereign debt crisis, one that they refuse to allow to repeat.
Italy as a country burdened by “legacy” debt
In Italy, then, the narrative is that the country toils under a “legacy” debt burden. It’s debt (and currency) woes are ones that occurred in the distant past. Mainstream Italian politicians often argue that since the euro’s formation, Italy has been more German than the Germans.
And fiscal conservatives see the fiscal probity as just one part of Italy’s strong economic profile. That’s where the talk of Italy’s net investment position and current account position comes from. So Tria is implicitly saying that Italy’s problems are legacy problems, old problems. In economic terms we call this differentiating between a stock variable and a flow variable. The debt is the stock and the flow is the deficit. Tria is saying the stock was so high to begin with that it’s hard to keep down — even in the most ‘fiscally virtuous” circumstances.
So the debate then becomes, how to remove that ‘legacy’ burden and uncover the hidden growth that Italy should enjoy. You can see some of this in an FT article from late May that I recommend. And I want to highlight this one chart from that article on interest payments as a percentage of GDP.
The fiscal conservative case says that Italy must continue its fiscal restrictiveness. And after the political turmoil passes, markets will reward Italy with low interest rates and debt to GDP will go down. These people point to Belgium as the example to follow.
Others see economic growth as the key. Faster growth means higher tax receipts and lower deficits as well as higher GDP. So the debt to GDP ratio shrinks due to both the numerator and denominator.
Italy as a country that wants the Euro
That’s the fiscal side of things. Inevitably though, the euro question comes up. Here’s Tria’s answer:
«The position of the government is clear and unanimous. There is no discussion about leaving the euro. The government is determined to prevent any emergence of market conditions that would lead to leaving the euro. It’s not just that we don’t want to leave it: we will act in such a way that conditions that could call into question our presence in the euro area don’t start to emerge. As Economy minister, I have the responsibility to guarantee, on a government mandate, that these conditions do not take place. The statements of the Prime Minister are along these lines and the government as a whole is responsible to the country».
The Italian government will do whatever it takes to remain in the Euro. When others outside of government talk about Italexit and the like, it is meaningless. That’s the message Tria is sending.
There’s a lot more to the interview but I am going to leave it there for now.
My view: the Italian crisis will fester, simply because there is no growth. But it is unlikely to become acute until the economy deteriorates or unless the government talks in any measure about increasing deficit spending. And more extreme talk by government ministers about repudiating government debt or leaving the euro would surely send Italian interest rates spiking.
Remember, Italy gave up monetary sovereignty over twenty years ago. Its fiscal and monetary choices are now extremely limited.
Please read more at Patreon.