Italy’s economy has virtually stopped growing in the aftermath of the financial crisis. Real quarterly GDP growth has averaged a meager 0.05% since 2010. As a result, the debt-to-GDP ratio has risen to an unsustainable 131%, as Italy, like most other Eurozone countries by the way, has recorded a budget deficit in each of the last 20 years.
Since government debt is usually measured at nominal value, nominal GDP growth is perhaps a better indicator of debt sustainability. But this doesn’t paint a much rosier picture, as average inflation is barely above 1%.
Fortunately, interest payments are relatively low because of the ECB’s monetary easing policy. In fact, one could argue that ECB President Mr. Draghi himself has saved Italy from a Greek-like tragedy. As the chart below shows, Italy’s interest payments as a % of GDP have come down significantly in the last couple of years as the ECB artificially pulled bond yields down.
In addition, Italy is finally trying to get rid of a large amount of bad debt, which could lead to higher GDP growth going forward. Nevertheless, Italy’s financial situation remains worrisome and a budgeting style more like Germany’s would suit the country just fine.