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The Italian debt crisis is far from over

Added on August 20, 2011
On August 13, 2011 Prime Minister Berlusconi and Finance Minister Tremonti put through a series of urgent financial measures in the Decreto-Legge n. 138, which was coming into effect the same day thanks to the signature of President Napolitano. I had the pdf file of the Decreto-Legge n. 138 with its 20 articles in front of me for a week. Unfortunately, it is written in gobbledegook. Therefore, we just have to believe Tremonti who summed it up as additional €45.5 billion in cuts which have to be added to the July austerity budget asking for €48 billion in savings. In total, Italy will have to live with some €93,5 billion in public budget cuts over the next three years (2012-2014). It remains to be seen whether what is on paper will be implemented. If so, it will represent an important first step towards fiscal sanity and debt reduction in Italy.

Article added on July 18, 2011  
The adoption of the Italian austerity budget in an historic express vote in both chambers of parliament and its promulgation just half an hour later by the Italian president does not mean the end of Italy's financial troubles.

The Italian debt crisis is far from over because Italy has been a low growth country for many years. Even if the budget deficit will be reduced to zero by 2014 as planned, the public debt will remain around 120% of GDP.

Italy has a long term debt problem. Structural reforms are needed to find back to growth. Without growth, the debt cannot be paid down. Decades of political and economic mismanagement cannot be corrected by an austerity budget.

Speculators have still years to attack Italy over its gigantic debt burden. Every now and then, even “ordinary” investors will grow wary of Italy's capacity to pay back its credits and/or to pay its interests on the 120% of GDP mountain of public debt.

Therefore, Italy will remain under pressure for years. It is too big to fail as well as too big to be saved by the European Union. As a consequence, the Euro will remain weak.


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Italy should never have joined the Eurozone because - as Belgium and Greece - it did not fulfill the Maastricht criteria of a maximum public debt of 60% of GDP. It is now up to the Italian voter, tax payer, politician and business community to comply with Maastricht in the long run.

The austerity budget as well as Prime Minister Berlusconi's announcement not to stand for reelection are first steps in the right direction. The giant bureaucracy, red tape, the lack of a business friendly environment, tax evasion, the huge black economy as well as the Mafia and its “parallel” economy are some of the structural problems Italy has to face. Already now, too many able and dynamic young and old people are leaving Italy. A continuing brain drain is the last thing Italy needs.

In addition to a business friendly environment, Italy needs credible and fresh political faces. One of the reasons for Berlusconi's long and infamous reign is the lack of able politicians as alternatives, both on the left and on the right.

Italy showcases the slow but steady decline of the Western world. In the EU as in the US, the welfare state has reached its limits. The financial crisis has shown that Ordoliberalism is needed more than ever. The times of the Nanny State are over. Ordoliberalism was Germany's answer to the failures and excesses of the Weimar Republic and Laissez-Faire, although as much Laissez-Faire as possible has to be allowed. A strong state is needed that eliminates monopolies, oligopolies, cartels, subsidies, red tape and that takes care of a functional state with an adequate infrastructure and educational system. Free trade and accountability - playing by the rules also for banks and other financial institutions - remain keywords for prosperity in the 21st century.


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