Italian Economy Faces Deeper Fiscal Crisis as Economy Worsens

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Italian Prime Minister, Matteo Renzi, attempts to reach a deal with the European Commission over the 2016 budget before the economy tumbles further, according to Reuters. Italy faces a barrage of economic setbacks, including a shortage of revenue and a postponement of privatization initiatives. The government expected 1.6-percent growth for 2016, but such a goal seems unattainable now.

Uncertainty lingers as the Italian government works with Brussels over the budget situation. The EU is taking a special interest in Italy because growth within the Eurozone hinges on the expansion of major economies such as Italy. Italy has been the slowest-growing economy in the EU in the past decade, with GDP expansion coming in at 0.8 percent in 2015, half the average growth within the Eurozone.

The bickering between Brussels and Rome started when the prime minister violated fiscal EU policy by raising goals for public debt and the deficit. Renzi is asking for more flexibility, but EU officials believe they have given Italy enough wiggle room in expanding the budget. Brussels may reach a final decision in the spring.

Growing Debt

The EU’s skepticism is justified when considering Italy’s ballooning public debt. Italy’s debt is over 130 percent of the economy’s output, and the southern-European nation holds the second-largest amount of public debt after Greece. Stalled projects and lacking growth prevent Italy from getting out of its debt crisis, but a bond-purchasing program from the European Central Bank provides an effective buffer for the Italian economy.

Italy still has to contend with high borrowing costs, and Italian banks remain stuck with 200 billion euros ($217 billion) of bad loans that have lost significant value in 2016. This prevents the free flow of credit needed to revitalize the economy, at a time when many businesses need loans to expand operations, but banks are beginning to make headway in certain areas. For instance, the government reached a deal with the European Commission allowing Italian banks to package bad debt into securities, including a state guarantee to lower the debt faster, notes Bloomberg Business.

Economic Outlook

While the banking sector is getting the help it needs, the process of reducing toxic debt will take time, a luxury Italy does not have now. Further, Italy’s trajectory appears grim as analysts note weak manufacturing output, investor uncertainty and waning business morale. However, Finance Minister Carlo Padoan remains hopeful that growth will lower the nation’s debt burden.