We’ve discussed in the past why Portugal and Spain could be next to follow in the footsteps of Greece and Ireland, two countries that have received external financial aid. But have we been overlooking a certain boot-shaped country in our search for the most vulnerable European economies?
It could be said that Italy is next in line to fall victim to debt woes. Wanna know why? Here are four major reasons why Italy could follow the path of the other troubled euro zone economies:
1. Enormous government debt
Its debt ratio is second only to Greece’s, just a hairline below 120% and well above the euro zone average of 84%. In nominal terms, this translates to government debt to the tune of 1.8 trillion euros, which is larger than that of Greece, Ireland, Portugal, and Spain… COMBINED!
Even though Italy was able to escape a credit rating downgrade in 2010, its high debt ratio has kept the country’s credit rating at risk. Down the line, this could lead to higher borrowing costs, which, in turn, could get in the way of the government’s cost-cutting plans.
2. Weak economic growth
While thinking positively is a good way to start the year, few analysts agree with the government’s estimates that the Italian economy will grow by 1.3% in 2011; 2.0% in 2012; and 2.05% in 2013. For one, the growth of Italian GDP from 1998 to 2008 only averages around 1.2%.
Also, I wouldn’t keep my fingers crossed for stellar economic reports from Italy. Aside from a flat productivity growth over the past few years, the economy has also been struggling with the underperformance of tax collections, lack of investment, and its large underground economy. Yikes! It’s no wonder that Germany has already recovered almost 70% of its output lost during the , while Italy has only gained back 20%!
3. Deteriorating current account balance
Weak demand for Italy’s exports is only one of the few culprits why its current account deficit reached 71.27 billion USD in 2009. Apparently, Italy has also been slipping on its pinky promise to keep the savings rate high in the public and private sectors.
The year-on-year average growth in exports of goods and services of Italy for the last decade has also fallen into negative territory, opposite the positive growth seen in other major euro zone economies like Germany, Spain, and Portugal.
After clocking in a current account surplus of 8.21 billion USD in 1999, it registered a deficit that ballooned to 78.87 billion USD in 2008, and is currently sitting at 59.25 billion USD. The figure that is worth 3% of Italy’s GDP might still be puny compared to Portugal’s and Greece’s 10% current account deficit, but that’s still a lot of moolah!
4. Political uncertainty
On December 14, the incumbent Italian Prime Minister Silvio Berlusconi won a very narrow victory in Italy’s lower house of parliament, indicating that the government’s power base is heavily divided. Specifically, Berlusconi got 314 votes for him, and 311 against him. Talk about a close call!
We have yet to see any adverse effects on the market of the political uncertainty surrounding Italy’s government, but if the division intensifies, it could divert the government’s attention from more important matters such as austerity measures to mere power struggles.
And that’s my list! Only time can tell whether Italy can pull through or not, so keep your eyes peeled for any new developments from the region! You know how problems and issues sprout up… They hit when you least expect them!