Policy Briefs

C. Bastasin: The problem is not EU’s fiscal rules, but Italy’s economic strategy

The argument that the Italian government is using to change the fiscal policy strategy is captivating. It is basically saying: “Let us try something new because in the past we followed austerity recipes and Italy’s public debt greatly increased.” Matteo Salvini and Luigi Di Maio used similar words to forward this argument. Both believe it is valid (they were probably pushed by their economic advisors) because it is in line with the very popular criticism directed towards past political leaders who were accused of having bowed to Europe.

The problem is that this interpretation, that is, austerity’s responsibility in increasing public debt by about 33 points between 2008 and 2016, is not a result of an in-depth analysis. Just a few calculations are needed to understand that the debt increase is largely the effect of an increase in spending for servicing the debt itself. Other, more technical, factors (among which are the nearly 4 points of Italy’s GDP in help to European countries in difficulty) may have also contributed, but it was the tension around the interest rates, caused above all by the uncertainty of whether Italy would remain in the euro, that increased the debt. The weak nominal growth of the economy helped reduce the debt by 5 points; otherwise it would have been close to 140% and without a careful budgetary policy by 2012 it would have been almost 150%.

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