Eurogroup President Jean-Claude Juncker struck fear into Italian hearts last weekend by suggesting that the Greek debt crisis could cross the Ionian Sea. But is it true, and if so, what can the Italian government do?
Berlusconi needs to come up with a plan to appease the ratings agencies
Eurogroup President and Luxembourg's Prime Minister Jean-Claude Juncker had a good reason for last weekend’s warning that Italy could be the next country to fall prey to the debt crisis that is engulfing Greece. Italy has the second highest public debt in the eurozone, after Greece. Italian public debt is equivalent to some 120 percent of its gross domestic product.
Despite this, Prime Minister Silvio Berlusconi is confident there is no comparison with Greek circumstances. On Tuesday he told the Italian senate, "We are all convinced that there should be no new borrowing. The government will not transfer the costs of this international crisis to the next generations. Our children will not pay for today’s difficulties."
Juncker foretold doom for Italy last weekend
The government program that Berlusconi is currently presenting in both houses of the Italian parliament is meant to signal both bold action and steadfastness. But US credit rating agencies seem to be distinctly unimpressed. The agency Moody’s last week threatened to downgrade Italy’s rating because of the massive public debt and weak growth forecasts.
No chance of tax cuts
The Italian economy has been stagnating for several years, and former European Union Competition Commissioner Mario Monti says it’s Berlusconi fault. "It was a big strategic error not to implement any economic growth program," he said. "That is now affecting the state budget and preventing any possible tax cuts."
Berlusconi’s right-wing coalition partners Lega Nord have been persistently pushing for tax cuts, but they have conspicuously failed to offer a plan to finance them. Monti, now president of Milan’s Bocconi University, says Italy’s state debt makes such demands completely unrealistic.
"There are a lot of reforms that could and should be implemented now to encourage growth, but tax cuts are not among them," he argues.
Moody’s expressed doubts over the Italian government’s ability to reform. A report published by the agency recently found "implementation risks" in Berlusconi’s consolidation plans, but the prime minister remains bullish. He is determined to balance the state’s books by 2014, and his finance minister Giulio Tremonti has already presented his scheme for achieving that: flat, wholesale cuts in all government departments.
Italy's recovery is making slow progress
Mario Draghi, governor of Italy’s central bank, is not sure whether this is a good idea. "In order to make sustainable and credible cuts to expenses, it’s not advisable to make the same cuts everywhere," he says. "Such a measure would put a brake on the weak recovery we have, and our GDP would lose two percentage points."
Draghi is a candidate to take over from Jean-Claude Trichet as president of the European Central Bank, when Trichet’s tenure ends in October. If he does win that position, Draghi can personally try to steer his native country clear of the trap that Greece has fallen into. After all, a debt crisis in Italy hardly bears contemplation. As the third biggest euro-country, a similar scenario there could be a deadly blow for the eurozone.
Author: Tilmann Kleinjung / bk
Editor: Thomas Kohlmann