Debt Quicksand Europe Fights the Growing Currency Crisis

By Carlo Angerer, and

Italy: Next in Line?


Italy has slipped in and out of financial markets' sights, most recently in July. 'We'll send the markets a strong signal,' Italian Finance Minister Giulio Tremonti has said.
DPA

Italy has slipped in and out of financial markets' sights, most recently in July. 'We'll send the markets a strong signal,' Italian Finance Minister Giulio Tremonti has said.

How did the crisis start?

Neither a real estate nor banking crisis sparked the financial emergency in Italy. Instead, poor budgetary management racked up enormous debts. Just as it did in the mid-'90s, the euro zone's third-largest economy carries a mountain of debt that equals more than 120 percent of its GDP. That's twice as much debt as Brussels will allow. Only in Greece is the situation worse.

What has been achieved?

New debts must remain under the European average and fall bellow the Maastricht Treaty's criteria of three percent of GDP by 2012. To reach this goal the Italian government plans to save some €40 billion over the next few years. The cabinet has sanctioned the savings measures, but final approval awaits a parliamentary vote. There is much to suggest that Rome can overcome this crisis more effectively than other southern European governments. The economy is still quite productive, the savings rate is comparatively high and its bond market is the third-largest in the world.

What are the obstacles?

Doubts have risen over whether the planned austerity measures will be implemented. There are also rumors that their main steward, Finance Minister Giulio Tremonti, may leave his post. Risk premiums for Italian government bonds have therefore reached record levels, which could endanger the country's banks, a number of which have invested in domestic bonds. Rome would be forced to prop up some of these institutions -- but government coffers are empty. Speculators have started to bet the country will become insolvent.

Italy

Economic Indicators 2008 2009 2010 2011 2012**
Debt (in percent)* 106.3 116.1 119 120.3 119.8
Economic Growth (in percent) -1.3 -5.2 1.3 1 1.3
Budget Deficit (in percent)* -2.7 -5.4 -4.6 -4 -3.2
Unemployment (in percent) 6.7 7.8 8.4 8.4 8.2

*Percent of annual economic output, **Forecast
Source: European Commission; As of May, 2011

The Crisis Countries Compared


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