A few months ago, I read an interesting article that stunned me regarding a topic I have always heard about: Italian public debt. I always asked myself how it was actually possible to have such a huge amount of sovereign debt compared to other European countries. The aim of my article is, therefore, to spread knowledge regarding a topic that is usually misinterpreted by people and used as an instrument of political propaganda.
Let’s start with clarifying that, even if none of us remembers it, Italian public debt has not always been at this level, meaning that, of course it has been lower, but it has also been higher at one point.
It might seem funny, but Italy started its history as a unified country in 1861 with already a huge amount of debt: in fact, in that year a law was passed by the Parliament of the Italian Reign and it led to the creation of the “Gran Libro del debito pubblico”(The Grand Book of Public Debt). The book reported the amounts of debt of each of the separate states that ceased to exist after the Risorgimento (Italian term that identifies the process of unification of the country). They were all summed up and Italy was ready to started its journey with the heavy backpack that would have later grown to become huge.
Since 1861, there have been four different peaks in the Italian history. The first one took place only 16 years after in 1897 and it was mainly due to the financial crisis of the end of the 19th Century; while, the second was caused by the excessive expenses that the government had to face during and after WW1 for fighting and reconstructing, causing public debt to reach its historical maximum (160% of GDP).
The third one was mainly caused by the 1929 financial crisis and the great depression, eventually increasing the debt even more by the beginning of WW2. During the post-war years, instead, a tremendous inflation put downward pressure on public debt to the point to reaching its historical minimum (25% of GDP).
The issue arises although, when we consider that the first three have been reabsorbed extremely quickly, while, after thirty years of increase, the current peak doesn’t seem to be solved. In detail, the current problem is rooted in the period of 1974-1994. It all started with the oil crisis in 1973, which caused inflation to boom rapidly with a peak of 21.7%. This, combined with an expansionary fiscal policy to promote the development of the welfare system, created a rise in deficit. Despite what one might think, the debt didn’t increase right away thanks to the effort of the Bank of Italy in buying bonds, which led to an immediate depreciation of the Italian lira. The bomb was dropped in 1981 by the Reagan administration, who decided to increase the interests rates, causing all the other countries to follow suit.
It is in this scenario that the Spread between German and Italian bonds reaches the highest value of 1175 basis points, something that nowadays seems surreal. Until this time, the huge increase in public spending had never been a problem because it was backed by a strong GDP growth. Hence, when in the 80s this growth started to vanish, the issue became real and it contributed to create the burden that the current and the future generations of Italians have to bear on their shoulders. Just to clarify with a number: in 1985 the deficit to GDP ratio was 14.7% and in just a decade, Italy’s debt reached the ceiling of 100% of GDP.
In the summer of 1992, right after the Treaty of Maastricht was signed, George Soros started a tremendous speculation and this forced Bankitalia to depreciate the lira, so that this pressure created a perfect environment for a new rise. From that moment onward, despite all the efforts, namely the austerity, a substantial solution have never been discovered on the issue.
So this is the path that led the 4th biggest European economy to have a debt equal to 2300 billions and equal to 132% of its GDP. It needs to be specified that the macroeconomic conditions didn’t help.
The situation today would have been different, if the tragedy of the Great Crisis didn’t happen, since the equilibrium on which Italy lies today is very precarious and mainly based on trust between investors and the institutions. The challenge that Italy had to face put this in danger and almost created an implosion, which could have led to a situation similar to Greece, currently the European country with the highest debt to GDP ratio (180.4%).
Given this story, making predictions about the future of the Italian debt is quite difficult. However, for sure it has to be mentioned the fact that loss aversion is a real thing and, hence, it is typical to mankind weighing more the negative than the positive effects: Italy’s primary surplus is among the highest in the world and has been the most stable among the Member States of the European Union for the past 23 years.
In conclusion, Italy have received from past generations a very heavy heritage, but, instead of complaining constantly about this, I believe the next generation, the first one who grew up in a world so interconnected and globalized, have the duty and the right to try to change the situation because they provided all the instruments and it’s just up to Italians deciding how to and when to use them.