Italy Threatened With a New Downward Spiral of Capital Flight and Economic Decline

Italy’s finance minister Giovanni Tria will today announce the figures for the Italian government’s budget plan for the year 2019. The announcement will reveal whether the government intends to comply with the requirements of the European Stability and Growth Pact regarding the reduction of the national deficit or is setting itself on a course for a strong clash with the European Commission. Professor Friedrich Heinemann, head of the ZEW Research Department “Corporate Taxation and Public Finance” at the Centre for European Economic Research (ZEW) in Mannheim, comments on this matter.

“The coming months will determine whether the Italian government will choose to follow Tria’s stance on spending or whether the country will revert to its previous course of mounting deficits and debt. If the finance minister is defeated in his efforts to reduce Italy’s deficit, however, this could put both Italy and the Eurozone in an extremely perilous position. Italy could be sent into another downward spiral of increasing interest rates, capital flight and economic decline.

Neither the European Central Bank nor European rescue mechanisms can provide support to a country that makes no effort to comply with European rules. If Italy, a nation whose public debt currently stands at two trillion euros, is pushed into a liquidity crisis, there is no way of knowing what the outcome will be. Anything could happen, from a new, large-scale banking and financial crisis to comprehensive guarantees from the Eurozone countries in violation of the rules laid out in European treaties.

It is possible that Italian populist parties are gambling on the fact that the country is ‘too big to fail’ and that the Eurozone states will be forced to help Italy’s government. Such speculation is extremely risky and seems to view the serious damage to the European Union that would result as an acceptable price to pay.”

For more information please contact

Prof. Dr. Friedrich Heinemann, Phone +49 (0)621/1235-149, E-mail friedrich.heinemann@zew.de