Italy Public Budget Policy and the Sovereign Debt Crisis

The process of fiscal consolidation, which culminated in the second half of the nineties with the achievement of the conditions necessary for Italy’s participation in the European Economic and Monetary Union, underwent during the first decade of the 21st century. a gradual slowdown, ending with the 2008-09 recession and culminating, in the second half of 2011, in an exceptionally virulent Italian sovereign debt crisis. Already at the beginning of the new century, in a context of persistent stagnation in growth and an easing of fiscal discipline, public accounts had shown a tendential deterioration and, starting from 2004, net debt of public administrations exceeded for three consecutive years the threshold of 3% of GDP set by the Treaty for joining the euro (tab. 4). The corrective maneuver adopted in 2007, strongly based on the increase in the tax levy, made it possible to bring the public budget balances under control, achieving results exceeding the programmed objectives, but at the same time leaving some structural problems unresolved: the adjustment was obtained with temporary measures, which made it possible to contain the growth of net debt but not that of public expenditure: the latter was excessively biased towards pension expenditure and was difficult to compress in the absence of structural reforms; the level of the tax burden had also reached values ​​above the average of the other EU countries and its further increase for financial stabilization purposes was not very sustainable. The sudden worsening of the macroeconomic situation produced by the 2008-09 recession has therefore resulted in an inevitable growth of both the public deficit, which exceeded the 3% threshold in the entire three-year period 2009-11, and the public debt, which in the same period. period increased by more than 14 percentage points, reaching 121.6% of GDP in 2011. The sharp deterioration in public finance parameters, albeit more contained than in other European countries, has posed a difficult problem for the government, given the limited margins available to budgetary policy to pursue rebalancing objectives and above all, to create favorable conditions for economic recovery. The package of measures planned in May 2010 to bring public accounts back in line with the financial stability objectives initially envisaged the adoption of a series of reforms for the liberalization of the labor market and services, which were later abandoned due to their highly unpopular. The maneuver therefore concentrated mainly on fiscal and public spending levers (linear cut of 10% of the expenses of ministries, abolition or amalgamation of bodies deemed useless, freezing of salary increases for public employees, freezing of hiring in the Public Administration) which allowed, unique among all European countries with high public debt, the formation of a primary budget surplus (tab. 4). However, this has not proved sufficient to prevent the Italy remained heavily involved in the sovereign debt crisis in Europe triggered by the risk of default in Greece (see euro area). In fact, starting from June 2011, the placement of government bonds has proved increasingly difficult and burdensome due to the worsening of the expectations of the financial markets on the government’s ability to cope with the sustainability of the Italian public debt (the consistency of which, amounting to over 1,900 billion euros in 2011, making it the fourth largest in the world in absolute value). Due to the rapid growth of the yield differential between Italian government bonds and German bonds with equal maturity (see spread), which jumped to 400 basis points at the beginning of August 2011, the Treasury found itself having to pay increasingly higher default risk premiums to refinance itself on the market, and despite the launch between July and August 2011 of two budget maneuvers aimed at once the budget was balanced by 2013, the financing conditions on the Italian debt market remained difficult. The weak growth prospects of the economy and the uncertainties related to the implementation of the reforms announced by the government have accentuated the perception of the risk of insolvency of the Italian public debt, prompting the underwriters of Italian government bonds to carry out massive net divestments in favor of bonds issued by countries with higher reliability (especially Germany). In just two quarters, non-resident investors sold Italian government bonds for over 70 billion euros, reducing their share of the overall consistency of Italian public debt from 47% to 40%. In November 2011, in conditions of exceptional difficulty due to the almost unsustainable financing of the Italian debt (the yield differential between Italian bonds and German bunds had reached a record level of 555 basis points) and the consequent risk of a liquidity crisis linked to the renewal of the high quota of maturing securities, a new additional maneuver (‘Save Italy decree’) was presented by the new executive who had just taken office, chaired by Mario Monti, in order to ensure the achievement of a balanced budget in 2013. The maneuver, IMU (see) and the TARES (Municipal tax on waste and services) – and for 25% from cuts in public spending, it also included structural interventions, including the reform of the social security system (with the raising of the retirement age also for women and the transition to the contribution system for all categories of workers) and some measures to stimulate growth. Fiscal consolidation measures and the adoption of unconventional monetary policy interventions by the European Central Bank – LTRO, Long term refinancing operation (see euro area), which provided the banks with the liquidity used to return to purchasing government bonds – restored market confidence in the sustainability of public finances in the first few months of 2012, favoring the decrease in the sovereign risk premium on Italian bonds. The easing of tensions has allowed the government to direct its action also on the objectives of strengthening competitiveness (‘Cresci Italia’ decree, which became law of 24 March 2012, no. 27) and of modernization of the public administration and (‘Simplify Italy ‘, which became law of April 4, 2012, no. 35) and to complete, in April 2012, the labor market reform project launched in December of the previous year (see also dismissal). However, the foreshadowing of a macroeconomic framework still characterized by strong criticalities, mainly due to the negative growth prospects, in part also linked to the effects of fiscal adjustment measures, contributed to making the climate of confidence and the expectations of consolidation of public accounts still uncertain..

Italy Public Budget Policy

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