Is Italy the next Greece?

The sovereign debt crisis in Greece is still at its dawn, but the repercussions on other weak countries like Portugal, Spain, Ireland... and Italy (whose public debt is 115% of its GDP and 6 times larger than Greece's) is becoming every day a bigger issue. 


Italy has done better than Greece in taking care of its fiscal matters during the crisis but the ratio between its debt and its GDP is still higher than Greece's, and its competitiveness is obviously directly proportional to its debt. This means that even if contagion from Greece is controlled, Italy remains very vulnerable in this uncertain time of post-crisis global economy.


In order to remain a member of the Euro area Italy should take action: adopt a 3 year program to raise its main balance by, minimum, 4% of its GDP and and put together a real devaluation vis-à-vis Germany of at least 6% through wage cuts and far-reaching long term structural reforms. Unlike Greece, Ireland and the Baltic countries, Italy is still in time to take action and avoid the eruption of the economy.
However, political Europe should also make the adjustment easy by targeting a weaker Euro, in which the G20 also has a vital interest as this would aid the continuation of a global recovery.


As in other countries, since the beginning of the crisis, debt in Italy and Greece has grown. In the biennium 2008 2009 Greece had public deficits twice the size of Italy's and added about twice as much debt as a share of GDP. This does not change, though, that Italy's Government debt is comparable to that of Greece.


Debt as % of GDP, Current and Projected

	2009	2011	2014
Japan	218.6	231.9	245.6
Italy	115.1	123.5	128.5
Greece	113.4	126.8	--
Belgium	97.9	104.9	--
United States	84.8	97.7	108.2
France	77.4	86.6	92.6
United Kingdom	72.9	89.3	98.3
Germany	72.5	87.8	89.3
Ireland	64.5	87.9	--
Spain	55.2	66.9	--
Sources: European Commission, IMF, OECD. Actions to recovery: A 3 year plan. Italy must not wait for its economy to break down before addressing its attention towards a recovery plan. In the next 3 years it must increase its primary balance by 4% of its GDP to ensure that the ratio between debt and GDP begins to decline.  Italy shall cut its unit labor costs and put in act a critical structural reform in order to reverse its loss of competitiveness. Critical structural reforms should include: removing rules that create a dual labor market and increasing the efficiency of backbone services on which depends the competitiveness of all firms in the economy.  In conclusion: Europe’s potential debt crises poses a large risk to a sustained global recovery; policy changes are the premiums the world needs to pay to insure against another collapse.