As Balboni noted, Italy’s sovereign debt pile, the largest in Europe at over €2.9 trillion, makes it vulnerable to any European market panic, no matter how tight it’s been with its purse-strings.
“We may argue the markets are unfair, but it’s useless,” said Carlo Cottarelli, a former Italian senator and senior IMF official who now directs the economic and social sciences program at the Catholic University of Milan. “It’s a fact of life when there is a shock to the EU economy, given our public debt. Even if it’s not fair.”
But the truth is that Italy’s economy has many vulnerabilities, including chronically low growth, an ageing population, and intrusive regulation overseen by a hidebound bureaucracy.
Perhaps the most glaring open wound is the so-called Superbonus, a tax incentive for home renovations that helped swell Rome’s deficit to 7.4 percent of GDP last year.
Rome has made a point of blaming the deficit on that policy alone, but that’s stretching a point. Oneglia argues that Italy still hasn’t embraced serious reform and is doing only the bare minimum to avoid economic embarrassment. With additional scrutiny, he said, markets might start to cotton on.
If they do, then rising interest costs could force Meloni into unpopular measures, such as reversing a €12 billion cut in labor taxes that also contributed to last year’s deficit.
