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C. Bastasin: Storm? Which Storm? — Italy's Weak Governability Can Lead to a New Crisis

image-03/06/2017 - 17:30Rarely has Italy’s governability been this complex. Every day, within the political community, people are relentlessly musing over new possible election dates. The main governing party has just split, and its majority faction remains exposed to the credibility crisis surrounding its leader, Matteo Renzi. At the same time, the major opposition party, Cinque Stelle (Five Star), does not seem motivated to form a coalition with other parties in order to overcome the threshold for a parliamentary majority as defined by electoral law, which itself remains in question. In the kindest words—these political conditions are not ideal for facing an impending storm.

The political inertia is all the more surprising because other worrying signs are also coming out of Rome. For example, the conventional wisdom is that Italian public debt would become a little more sustainable if inflation would only return to normal levels, close to 2%. This scenario should allow lower taxation relative to public expenditures, i.e., a smaller primary budget surplus should be needed to cover the interest payments on the country’s public debt. Lower tax rates should help facilitate the country’s economic growth, thus reducing the debt-to-GDP ratio. However, Italy finds itself in an unfavorable situation—Italian inflation is lower than the European average, as it should be for a country that wants to recuperate competitiveness, but the interest rates on Italian debt is higher than the European average. An increase in European inflation, therefore, risks becoming an additional problem instead of a solution. 

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