As the Italian government attempts to sell more public debt today in a bond auction, the focus of the euro crisis will briefly shift to Italy’s economy ahead of Sunday’s closely watched elections in Greece.
This week Italy’s borrowing costs have risen amid concerns over Spain’s new rescue aid, debt contagion fears, and a Austrian finance minister who boldly proclaimed that Italy may also need a bailout. The finance minister later retracted her remarks but the damage was already done as evidenced by rising Italian bond yields.
Some economists are already comparing Italy’s economy to the scorned group of crippled southern European economies such as Greece, Spain, and Portugal which have been forced to wear financial Euro zone life jackets.
While it is true that the Italian economy faces some large obstacles ahead on the road to recovery in the euro zone, the third largest economy in the euro zone (seventh largest in the world) is fundamentally stronger and better prepared to withstand debt contagion and euro crisis than the other southern European countries which have already received a financial bailout.
Although Italy’s unemployment level has risen this year to 10% from 8% and 28% to 35% with Italians under 25 years old, it remains far better than Spain’s 25% unemployment level and 50% for Spaniards under the age of 25.
Greece, Ireland and Portugal all have unemployment rates above 14 percent. Wealth in these countries is quite low compared to Italy.
Italy did not experience a real estate bubble as Spain and Ireland did in 2008- present day.
Consequently, Italy’s banks are far less exposed to toxic real estate debts and are better capitalized.
While Ireland and Greece ran large deficits, Italy managed to not overspend.
Italy’s deficit is modest at 3.6 percent of GDP compared with Spain’s 8.9 percent.
But Italy’s economy remains firmly in recession and their overall long term debts are significant.
Italy’s gross domestic product (GDP) is expected to decrease this year amid the deepening recession. The Italian central bank has said it will be content if the decline does not exceed 1.5 percent.
Italian industrial output has contracted every month since early 2008.
Italy’s large pile of debt, which is already at 120% of GDP and is expected to exceed €2 trillion mark this year, remains a formidable long term challenge for their struggling economy.
Italy’s debt of € 1.9 trillion is more as a share of its economy than any other developed country except for Greece and Japan.
In December 2011, the Italian government passed an austerity package aimed at lowering their borrowing costs and creating a better structural environment to pay down their gigantic long term debts.
The Financial Times reported that according to consumer association Federconsumatori, the Italian government’s nearly $40 billion package of tax increases and spending cuts will cost the average household about $1,500 each year for the next three years.
In mid February Moody’s downgraded Italy’s credit rating to A3, from A2.
Last November, Italians forced Prime Minister Silvio Berlusconi to resign.
Italians brought in a technocratic government, led by the most respected economist in Italy, Mario Monti.
Monti offered sweeping programs of economic reforms which became held up in Parliament with the exception of approved deficit shrinking tax increases.
Recent polls in Italy have shown that Italian support for Monti is growing weaker.
Attaining economic growth amid rising unemployment and higher taxation remains a fundamental challenge for Italy, especially in a highly volatile economic and political environment within the euro zone that makes stability difficult to achieve.
Italy must discover a path to become more competitive and efficient in the global economy.
Italian Bond Auction
Today the Treasury will sell as much as €4.5 billion of three, seven, and eight year Italian bonds.
* Breaking News- Bloomberg reports that Italy sold € 4.5 billion in their bond auction, the maximum target that was offered today.
Reportedly, €3 billion of 3 year debt was sold 1.4% higher than a month ago. The bond auction was considered a success although borrowing cost are notably higher.