Europe on high alert as Italian debt rises

Earlier this month, Europe was put on high alert as Italy’s 10-year debt rose to a five-year high of 290. Italy already has a debt of £2tn, which equivalent to 132% of GDP and the second highest debt in the whole of the eurozone, just behind Greece. Markets have become increasingly nervous over Italy’s recently appointed coalition government’s plans to introduce huge tax cuts and welfare spending in its 2019 budget plans.


The government’s flat tax plans would cost £45bn a year and the basic income for those who need desperate financial help (such as benefits) would set Italy back £15.3bn alone, while a pension reform would cost around £7.2bn with a suspension in VAT rises.

Earlier this month, Luigi Di Maio, Italy’s Deputy Prime Minister, put the eurozone on edge after announcing that their government would be ignoring agency warnings to carry on with their reforms. Giovanni Tria, Italy’s Finance Minister, also warned that the country would suffer from repercussions when quantitative easing ends.

Quantitative easing, or QE, is an expansionary monetary policy where central banks buy predetermined amounts of government bonds in order to help the economy of the country.

It has been argued that Italy is already in a recession; due to both its flat financial growth over recent years, and its growing debt pile.

Experts (specifically Professor V.K. Fouskas of the University of East London) have advised that there are only two paths that Italy could take as alternatives. The first, to ignore European Central Bank rules on monetary discipline and raise inflation; which would mean Italy would have to leave the Economic and Monetary Union. The second, would be to take a similar path to Greece, which saw the ECB and IMF committee obtain more than €288bn in loans to keep it afloat.

Both paths would be completely catastrophic for both Italy and the EU. Italy has a large economy. Leaving the EU, or just leaving eurozone, would have immensely negative consequences on Europe and the world.

There are fears of increasing conflict between Italy and the EU over the coalition government’s budget plans. In the recent weeks that have passed, the Lega and Five Star Movement coalition has already threatened an all-out war with Brussels as it demands more money to implement its plans. These potential paths for Italy’s finances don’t seem to have a positive outcome.

The European Commissioner has announced that he is not frightened about the state or future of Italy. But how Italy’s performance will impact Europe is hard to say. Experts are uncertain whether or not we should be worried about Italy’s debt crisis at the moment, because Italy haven’t chosen which path they will be taking in the future.

The euro isn’t in crisis at the moment, but the potential for financial crashes in the EU is very real, and if the euro were to crash, we might even see a similar situation to the one that Britain is in right now.

 

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