European economic crisis: Why Italy is seen as too big to bail out
While Italy has a fairly low budget deficit, structural issues such as low productivity have resulted in an economic crisis. Its public debt, at 118 percent of GDP, is one of the highest in Europe.
Italian politicians are hardly known for being prompt, or for sticking to plans. Yet when Prime Minister Silvio Berlusconi announced a series of economic reforms aimed at reassuring markets, Europeans leaders were quick to welcome them as “crucial measures” to avoid a crisis that would threaten the stability of the whole European Union: Italy's default.Skip to next paragraph
Subscribe Today to the Monitor
Following advice from the European Central Bank, Prime Minister Berlusconi vowed on Friday to approve labor reforms in September and to achieve a balanced budget by 2013. On Monday a joint statement by German Chancellor Angela Merkel and French President Nicolas Sarkozy welcomed the plan as “crucial.” They also stressed the necessity to “implement the announced measures as soon as possible and in a complete manner.”
Since Standard & Poor downgraded its credit rating outlook last May, Italy's public debt has been under constant attack from international markets, fostering speculation about the country's possible default. Wealthier eurozone nations such as Germany and France, already strained by the effort to save other embattled nations such as Greece and Portugal, appear deeply concerned about Italy's economic woes.
“They are so worried because Italy is too big to be saved,” says Tonia Mastrobuoni, an economic journalist at La Stampa newspaper. “As opposed to Greece and Portugal, we have no alternative but saving ourselves.”
Ms. Mastrobuoni argues that Italy's difficulties have their roots in structural problems such as low productivity rather than financial turmoil. Italy's budget deficit, currently at 3.9 percent of GDP, is already one of the lowest in the eurozone – although it is still higher than the 3 percent allowed under EU regulations. “The problem is that Italy's economy hasn't been growing for more than a decade, and all of a sudden the international markets seemed to have realized it,” says the journalist.