It is well known that, in the space of a few days, strong market tensions raised the measure of the spread on the German Bund of the benchmark bonds of the Italian public debt by fifty percent. It happened around the first ten days of July. The widening of the BTP spread took place in the wake of the continuation of the Greek debt crisis and in the absence of substantially new economic data in the Italian scenario.
The slower march of the Italian recovery has been visible for some time. In the first quarter of this year the GDP of our country had recovered only a quarter of the fall of the recession. In Germany, on the same date, the compensation of the seven percentage points of real output lost between 2008 and 2009 was instead already completed. Conjunctural, between January and March the rate of expansion of the Italian GDP stopped at +0,1% against the +0,8% of the euro area average and the +1,5% of Germany.
Some authoritative forecasts of growth results in the second quarter indicate the possibility of realigning Italy's recovery progression to the average rate of the Eurozone. It is an encouraging prospect, at least to counter scenarios of further widening of the development gap between us and our EU partners. If the weak growth data of the Italian economy had been known to the market for some time, the sudden widening of the BTP spreads probably represents the reaction to a different element of the scenario. Let's talk about the change that has taken place in recent months in the perception of the rules of the game on the sustainability of public finances.
In theory, in Europe the treaty signed in Maastricht in the first half of the XNUMXs already required signatories to exercise a double discipline. Contain the deficit and, at the same time, start a process of reducing the ratio between public debt and gross product towards the threshold prescribed by the Treaty. In practice, the years following the launch of the single currency saw the discipline of the deficit establish itself with relative continuity. What has remained more in the shadows in the concrete application is the issue of reducing the ratio between public debt and product.
Today, following the crisis that started with the American problem of subprime mortgages and is now focused on the issue of European sovereign risks, sensitivity towards a rebalancing of public and private debts in relation to growth has understandably increased greatly. This is the novelty that needs to be reckoned with. In 1995 the public debt-GDP ratio was 121% in Italy. Between 1995 and 2004 it decreased to 104%. In the years of crisis and recession, between 2008 and 2010, it went from 106% to 119%.
This year, according to authoritative projections, the public debt-to-GDP ratio will settle at 120%, substantially returning to around the values of around fifteen years ago. Focusing on the experience of recent years, what must undeniably be recognized in Italy is a better ability than others to control the growth of its public debt. Against the thirteen point increase achieved by our country, between 2008 and 2010 the ratio between public debt and GDP rose by fourteen points in France, by fifteen points on average for the euro area, by seventeen points in Germany , eighteen points in the EU total, twenty points in Spain and thirty-two points in Greece.
If, between 2008 and 2010, the variation – the fall and the recovery – of Italy's GDP had been the same as the euro area average, the public debt-to-GDP ratio would have stood at 2010 in 118 instead that 119. If Italy had experienced the same recovery in 2009-10 that Germany experienced, the ratio between public debt and GDP in our country would have stopped just above 116% last year. This is all other things being equal. As has been authoritatively pointed out "the solvency of sovereign states is no longer an established fact but must be earned on the ground with high and sustainable growth, possible only with the accounts in order."1 Over the past few years, Italy has shown a decent ability to keep accounts in order. In the new paradigm of policy rules and market conventions that is increasingly visibly consolidating, our country is being asked for a change of pace on the growth front. It is a very demanding challenge, certainly more difficult today than in the past when important maneuvers to restore public finances were associated with substantial devaluations of the exchange rate.
It happened in 1992-93, when the outflow of the lira from the EMS was combined with the setting up of a corrective maneuver of the public budget of no less than 93 trillion lire. It then happened again in 1997, when a reduction of four points in one year in the ratio between public deficit and GDP took place in the presence of a devaluation of the lira against the dollar in the order of 10 per cent. In recent years, the "exchange rate" variable has contributed to making the mix of policies used by other countries against the effects of the crisis even more expansive. This happened, for example, in the USA and the UK. In 2007, it took 1,5 euros to buy a pound.
Today 1,1 is enough. Just one year ago, one euro was worth 1,2 dollars. Today it is worth 1,4. Countries with growth prospects certainly no worse than those of the euro area have currencies that prove to be weak against the single European currency. Tight in its role as an “anti-dollar” currency, the euro will continue to remain relatively strong. This will happen at least until the great game of reallocation of the "holdings" of the new Asian investors - primarily the Chinese - will find a balance point. At the end of June, Beijing's stock of foreign exchange reserves reached an all-time high of $3.200 trillion – something that is beginning to approach the order of magnitude of Germany's GDP – almost doubling the value of just three years ago.
The funds available to the Chinese are growing, but their interest in further investments in dollar-denominated assets is fading. After having grown for many years, in the spring of 2011 the stock of American government bonds held by Chinese stopped (from 414 billion dollars in April 2007 to 1.175 billion in October 2010 to 1.152 billion in April 2011). As always happens in economics, what may seem like a constraint in some respects will be an opportunity in other respects. Pending a global rebalancing of the exchange rates between the two major world powers – the USA and China – the relative strength of the euro will serve to contain the inflationary pressures deriving from raw materials. Compared to other historical experiences of the past, in Italy the combination of relaunching growth and reorganizing the public finances will have to be of a higher quality this time.
What once came from the cyclical bonus of devaluations will have to be replaced with the structural dividend of modernization interventions that will make the country finally capable of taking advantage of the polycentric character assumed by internationalization and the new geography of world economic growth. The world is growing thanks to manufacturing and the growing driving force of the demand for goods and services of hundreds of millions of members of the new consumer bourgeoisie. Italy is a solid and industrious country, which has all the numbers to produce and sell goods and services that appeal to the changing world and its new consumers. The twenty-three million Italian families have them, whose debt ratios in relation to disposable income are one third lower than the average for the Eurozone (66% against 99% in 2010).
Italian companies have them, which, despite all the difficulties, see the number of our presences on exports increase by 2010% in 6. In the XNUMXs, the external constraint of the single currency forced Italy to take action to restore and broaden its economic and social horizons. The same challenge of recovery and relaunch must be taken up now, getting out of the vicious circles and increasing cohesion and competition.
Source: Focus Bnl
