So, how did Italy wind up in this dire state? In a word, tradition. By that I primarily mean two things. First, Italy has a long tradition of huge public debts. Second Italy is a traditional country- old ideas, old people.
Anyone who ever had the chance to see the old Italian Lira would certainly have noticed the large number of zeroes on each note. When Italy changed over to the Euro the Lira was valued at about 1900 Lira per 1 Euro. I complain now because I can only get one Euro for a $1.40. In Italy's 150 year history the only time the public debt was below 60% were the 30 years after the US eliminated Italy's debts through the Marshall Plan- Italy's golden years. It has breached the 100% level during four different periods for a total of about 40 years of its 150 year history.
So Italy has a long history of dealing with these problems. This near constant indebtedness led to the funny money quality of the Lira. Quick Econ 101 break: When a country is going broke, it usually has two weapons at its disposal- fiscal policy and monetary policy. Fiscal policy is what Washington is going nuts over right now- the budget. Spend less than you earn, and you can use some of that money to pay your debts. Of course, as Greece will tell you, a penny-pinching government ends up pinching everyone. Monetary policy is essentially when a government thumbs its nose at the people who loaned it money. They do this by devaluing the currency the debt is valued in. "What we owe 10 billion? Add another zero to the Lira!"
Using fiscal policy to get your way out of debt causes great short-term pain. Using monetary policy also causes short-term pain (inflation), but this is somewhat balanced by an entirely positive benefit- any company that exports just saw its products get 10 times cheaper in foreign markets.
But when Italy tightened its belt one last time in the early 90's to convince Europe to let it into the Euro, it meant the end of printing out new Lira to pay their debts. There could only be one monetary policy for all the countries in the Euro, and everyone knew the powerful Germans would really decide for everyone else. Why doesn't Germany/the EU just pull an Italy and inflate its way out of Greece/Ireland/Portugal/Italy's problems? Well, last time Germany tried printing money it needed to pay its debts it unleashed a hyperinflation so fierce only Hitler could solve it. You want to tell the Germans it's ok to try it again?
So Italy squeaked its way into the Euro by tightening its belt. But it wouldn't really be fair to say they hit the buffet bar hard after joining. Despite being in a period of glacial growth usually peaking at about 1% for over a decade now, there were no stimulus packages here. Still, they couldn't get the debt level below 105%, and then America went and started a global recession and Italy's debt moved up to its current perilous level of 120%.
Italy have been relatively disciplined for about 15 years now, and yet their debt is higher than ever. One important, unavoidable reason is age. Italy, contrary to outdated stereotypes, has had one of the world's lowest birth rates (currently around 1.5 children/female) for decades. This has left a country chocked full of old people. Two problems there: old people don't work, and they do collect state pensions. For years now people have rang alarms in America about the costs of supporting the Baby Boomers when they retire. Well America's generational crunch will be a fraction of what Italy has had to live through thanks to immigration and a relatively high birth rate even after the end of the Baby Boom. The only good news for Italy is that, opposite of the US, the proportion of the economy the government will have to fork over has already peaked. Good news for my kids, at least.
No comments:
Post a Comment