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C. Bastasin: Italy’s Recovery Plans require the mobilization of private savings

Most advanced economies will emerge from this year with a substantially higher level of public and private debt. The pandemic’s recent resurgence throughout the world has affected the outlook for growth and increased the risks of financial instability. So far, questions on the sustainability of historically high levels of public debts have been muted by the exceptionally low level of interest rates. With sovereign bond yields close to zero, doubts on public debt sustainability have been postponed to the time when central banks will decide to change the course of monetary policy.

The Covid-19 pandemic hit an Italy with a high level of public debt and a weak economy. The low level of interest rates in the eurozone made it possible for Italy to contain the consequences of the sudden increase of its debt-to-GDP ratio. The European Commission 2020 Autumn Forecast expects the Italian economy to contract by 9.9% in 2020 and grow by 4.1% in 2021. The Commission projects the government headline deficit in 2021 to decline to 7% of GDP and the public debt-to-GDP ratio to remain slightly below the level of 160%. The main criticism coming from Brussels concerns the fact that some of the government’s measures to counter the current crisis do not appear to be temporary or matched by offsetting measures, and this could potentially jeopardize the medium-term sustainability of Italy’s public debt. Overall, the reasons for Italy’s debt sustainability rest on the expectation of a future level of growth that is higher than the current very low level of interest rates.

This short policy brief raises the question of whether the economic consequences of the pandemic imply a different source of risk that is not fully taken into account while judging public finance sustainability, namely the fact that private actors will emerge from the current recession overburdened by debt as well, and this in turn will influence the level of equilibrium of interest rates as well as the economy’s growth rate. This eventuality can become significant if some consequences of the pandemic’s shock are to persist, creating a backlog of sectoral disruptions, private firms failures, increase in banks’ bad loans and higher unemployment.

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