Italy's lost decade: is Italy the world's new Greece?

Author:Lachman, Desmond
 
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Judging by the still relatively buoyant Italian sovereign bond market, one could be forgiven for thinking that all is well with the Italian economy. Similarly, one could be excused for believing that Italy poses little threat to the world economic outlook. After all, despite its major defeat in the recent constitutional reform referendum, the Italian government can still readily borrow long-term from the markets at a rate of a mere 2 percent, or at a significantly lower rate than can the U.S. government. More striking yet, in October 2016 the Italian government took full advantage of the market's seemingly relaxed attitude towards the country's moribund economy and its political disarray by placing a fifty-year sovereign bond at a less than 3 percent yield.

Before allowing very favorable market pricing to lull one into a false sense of security about the possible risks that Italy might pose to the world economy in the year immediately ahead, one might want to recall Greece's recent experience. In 2009, on the very eve of the European sovereign debt crisis, the Greek government could raise long-term funding at practically the same very low rate as could the German government. It could do so even though the country was on the brink of the largest sovereign debt default in history as well as of an implosion of its economy that bears a striking resemblance to the U.S. economic depression of the 1930s.

Sadly, today there would seem to be as many reasons for worrying about the Italian economy as there were for worrying about the Greek economy back in 2009. Like Greece then, Italy today checks all too many of the boxes for the making of a full-blown economic and financial crisis within the next year or two. Now adding to that concern is the likelihood of a prolonged period of Italian political instability following the recent referendum, which threatens to cause capital to leave Italy at an even faster pace than it did in the run-up to that referendum.

Among the more basic reasons for deep concern about Italy is its demonstrated inability to deliver meaningful economic growth over the past two decades. Indeed, the Italian economy today is barely above its level in 1999 when the country adopted the euro as its currency. Worse still, since the Great Global Economic Recession in 2008-2009, Italy has experienced a triple-dip recession that has left its economy today some 7 percent below its pre-2008 crisis peak level and its unemployment rate stuck at...

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