Italy's Economic Crisis: A Tough Road Ahead
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Case Code: ECON071 Case Length: 14 Pages Period: 2018 – 2019 Pub Date: 2019 Teaching Note: Available |
Price: Rs.400 Organization : - Industry : - Countries : Italy Themes: Economy |
Abstract Case Intro 1 Excerpts
Introduction
On January 11, 2019, Italy's Interior Minister, Matteo Salvini (Salvini), said the country was "absolutely" prepared to face an economic crisis if it happened. Italy’s economic progress had lagged behind many other countries in the eurozone for years. High public debt and long-term economic underperformance had made Italy's economy the Achilles heel of the eurozone. The popular discontent against the European Union’s (EU) austerity policies that had done little to boost Italy's fortunes only further compounded the issue.
Italy's March 2018 general election gave the voters an opportunity to replace the political establishment that had ruled the country for decades with an anti-establishment government. In the election, none of the parties won a clear-cut majority, and the populist Five Star Movement (M5S), one of the big winners of the election, joined hands with the nationalist Lega Nord (Northern League) to form a coalition government. The new government came out with a big-spending budget in 2019 to meet the election campaign promises of providing a minimum income for the unemployed, tax cuts, and lowering the retirement age. Italy and the EU opposed each other over the new government's high-spending fiscal plan, which also triggered a sharp fall in the European markets. The populist government wanted some radical changes within the EU with respect to the euro and the migration policy, which some investors feared would create an existential threat for the EU in future. The budget created panic in markets around the world and left investors worried about the fate of the EU. Some analysts said that it would intensify the financial crisis and recession in Italy and Europe at large. But the coalition government defended its right to make its own decisions which affected its people and the country.
The EU officials faced a dilemma on how to handle the situation and bring normalcy back in the eurozone. Some observers felt that the EU would lose credibility if it failed to discipline Italy as an errant member. However, its adopting an extreme approach would further damage ties between the EU and Italy.
Finally, the European Commission (EC) rejected Italy's draft budget in October 2018 and asked the government to reconsider its spending plans. Italy considered reducing the deficit target from 2.4% of GDP to 2.04% in an attempt to defuse the row with the EU. Analysts said that while the revised budget agreement between Italy and the EU would ease market concerns, it might not help to find a long-term solution to the country's economic problems. They were doubtful whether the agreement could stop the government from fulfilling its election promises under pressure from the EU. Going forward, it remained to be seen whether the populist government would be able to maintain a proper balance between ensuring the growth of Italy's economy while keeping the interests of eurozone member states intact.
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