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ECON 6644-02

 On November 21, 2018; Italy revealed a budget deficit that violated the EU’s rules on fiscal discipline. Due to this announcement, investors are demanding higher risk premiums for holding Italian bonds which are leading to higher borrowing costs for Italian banks. For example, a farmer by the name of Gian Enrico Grugni applied for a €400,000 bank loan to buy land and new cow stalls. While waiting for his application to be approved, the interest rate charged from the bank significantly rose leaving less money to be spent on the business.

Due to Italy’s impending budget deficit, Italy’s government has attempted to stimulate growth in the economy by “lowering the pension age, raise welfare benefits for the poor and jobless and cuts income taxes” (Sylvers, 2018). On the other hand, if the government is unsuccessful, then this could lead to “further market turbulence, credit downgrades, and more problems for Italy companies” (Sylvers, 2018). Economists say that the rising borrowing costs could lead to banks being too cautious when allowing borrowers to request loans. Consequently, Italian companies are now seeking new loans and credit lines faced with tighter lending conditions (higher interest rates and increased collateral) according to a recent European Central Bank’s survey.

Moreover, already the European Commission is predicting that there would be a slow 1.2% economic growth in Italy. Stocks, from the UniCredit Spa and Intesa Sanpaolo SpA are down by 40%. Furthermore, almost 90% of Italy’s companies (mainly small and medium-size) will be hit the hardest because they generally need the loans for financing. Due to the rising borrowing costs, these companies will have a much harder time paying off the loans and will slowly start closing due to their costly borrowing costs. All in all, Itlay needs to do something about fixing their financial, political and economic problem. Without having an economic stimulus initiative plan in place, Italy will continue having financial problems and possibly head towards a recession in the future.

 Sylvers, Eric. (Nov. 21, 2018). “Italy’s Big Budget, Designed to Help Business, Is Hurting It” The Wallstreet Journal. Dow Jones &amp, 2017. Retrieved http://www.wsj.com/articles/itlays-big-budget-designed-to-help-business-is-hurting-it-1542796201

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Comments

  • Budget deficit still within Maastricht criteria (3% GDP), yet government debt (+133% GDP) indeed way out of the required 60%.

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