- Italy’s public finance situation is worrying, but not yet disastrous
- The new populist coalition made costly election promises that could bring about default or a euro exit
- To avoid a crisis, they must spend enough to appease voters but not enough to spell disaster
- If tension between the two populist parties grows, the government could collapse
The hazardous condition of the Italian public finance situation is well-known. Its public debt amounts to some 132 percent of gross domestic product, its budget deficit could easily reach 3 percent of GDP by the end of this year, and its economy is growing at an annual rate of about 1.2 percent. In short, high public indebtedness makes Italy vulnerable to rising rates of interest, while slow economic growth makes it difficult to reduce the debt burden relative to GDP. All of this has the international financial community worried, as witnessed by the spread on the 10-year Italian treasury, which jumped from 120 basis points in May 2018 to over 300 points in mid-August.