M. Messori: Five Bullets on Italy in the Euro Area and the Hidden Risks of 2016

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In SEP’s view, Italy’s Public debt remains one of the most critical “economic problems” for the European Economic and Monetary Union (EMU). The dynamics of Public Debt-to-GDP ratio in 2016 is therefore  a crucially sensitive variable.

SEP’s forecasts of the dynamics of Public Debt to GDP is characterized by the following features:  

• The draft of Italy’s “Budget Law” (Legge di Stabilità), issued few days ago, assumes that the Public Debt-to-GDP ratio will decrease in 2016. 

• However, according to the macroeconomic figures offered by the “Budget Law”, the Public Debt-to-GDP ratio will decrease only if the 2016 GDP rate of growth is at least equal to 1.2%.

• This ratio will remain constant if the GDP rate of growth is equal to 1.1%, and it will increase with a GDP  growth rate lower than 1%.

• Should the 2016 GDP rate of growth be equal to 1.1%, Italy’s public debt-to-GDP ratio would follow the trend depicted in the graph below. 

• This latter event cannot be discharged as a tail (that is, a low-probability) outcome. This justifies SEP’s view.   

image-05/04/2016 - 18:22