An Italian economic accident waiting to happen

Economist Herb Stein famously said that if something cannot go on forever, it will stop. If ever Stein’s dictum had applicability, it is to Italy’s currently unsustainable public debt situation. Once the European Central Bank (ECB) stops buying Italian government bonds on the massive scale that it has been doing over the past 18 months, Italy likely will be at the center of another round of the European sovereign debt crisis.

It would be a gross understatement to say that Italy’s public finances are unsustainable. Italy’s public debt to GDP ratio skyrocketed during the pandemic to over 155 percent of GDP. That was the highest such ratio in the country’s 150-year history and well above its level after World War II. At the same time, the country’s budget deficit blew out to over 9 percent of GDP in both 2020 and 2021.

In the period ahead, Italy’s public finances could be further compromised should the country’s shaky banking system need meaningful public support. Underlying the risk of such an eventuality is Standard and Poor’s recent estimate that in 2022 the share of non-performing loans in the Italian banks’ balance sheets could rise to 10 percent.

 
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