Italy’s budget: some views

Sadly, Italy has all of the preconditions for another round of the sovereign debt crisis. It is not simply that with a public-debt-to-GDP ratio of over 130 percent, it is the eurozone’s second-most highly indebted eurozone member country. Rather, it is also that the country suffers from a sclerotic and uncompetitive economy as well as from the shakiest of banking sectors that all too likely will soon be in need of a government bailout.

[…]the EU authorities would do well not to oppose the current Italian government’s plans too aggressively. If mainstream liberals are worried about the implications of a democratically elected populist government, then they should worry even more about what could come next if economic circumstances worsen. At this stage, Italy needs stronger nominal GDP growth – plain and simple.

Italy’s government currently spends roughly 50% of GDP. The center-right populists that won the recent election favor higher government spending. (Notice how often spending rises faster when the right takes office.) Yesterday they reached an agreement on a budget that will boost spending significantly, enough to boost the budget deficit from 0.8% of GDP to 2.4% of GDP. The previous government understood that Italy had a severe debt problem, and was committed to gradually reducing the debt as a share of GDP.

Reactions to the size of the proposed plan rely on discredited assumptions and betray a fundamental misunderstanding of economic growth—and austerity.