Commentary

Op-Ed: Italy, the 'sick man of Europe,' tries to administer its own medicine

Key Points
  • The extended outbreak of coronavirus shows little sign of dissipating in some of Italy's industrial powerhouse regions.
  • But the government in Rome received some good news this week, with the first formal accounting of the national budget deficit for 2019 coming in below previous targets, at 1.6 percent of total national output.
  • That is, significantly, almost half the European Commission's permitted level of 3%. 
A woman reads a newspaper outside Duomo cathedral, closed by authorities due to a coronavirus outbreak, in Milan, Italy February 24, 2020.
Flavio Lo Scalzo | Reuters


The Italian economy was already looking rather parlous at the start of this year, with global bodies like the International Monetary Fund (IMF), World Bank and European Commission all predicting almost negligible growth rates.

Even the January forecast from Italy's official statistics agency suggested that gross domestic product (GDP) would increase by just 0.2% over the course of 2020, far below the 0.6% tentatively predicted by the coalition government several months earlier.

The nation's banking sector remains in the doldrums, with credit availability for businesses looking to expand remaining tight, and an anaemic consumer sector. Perhaps as a consequence, the country's banking stocks took a hammering Monday morning, even as other elements of European equity markets finally began to perk up.

And now, with the extended outbreak of coronavirus cases showing little sign of dissipating in some of Italy's industrial powerhouse regions, the country must contend with the increasingly serious economic implications of a virus-induced slowdown, alongside the obvious human tragedy provoked by the loss of dozens of lives and the emergency treatment of hundreds of acutely ill patients. 

But the government in Rome received some good news this week, with the first formal accounting of the national budget deficit for 2019 coming in below previous targets, at 1.6 percent of total national output, well under the targeted 2.2 percent. That is, significantly, almost half the European Commission's permitted level of 3%. 

This development will encourage officials to spend more on combating a potential pandemic, and already the Italian Economy Minister Roberto Gualtieri has announced that his department would respond aggressively to prop up the ailing economy. He pledged 3.6 billion euros ($4.01 billion) worth of measures — equivalent to 0.2 percent of GDP — in addition to an earlier promise of 900 million euros worth of aid.

The newly announced measures will include tax cuts, corporate tax credits for businesses that are hardest hit by the virus, and extra money for frontline health care efforts.  

The "sick man of Europe" had already floated the idea of a fiscal response last week, when Deputy Finance Minister Laura Castelli suggested that the European Commission would need to give her government some leeway to spend more, in a way that will almost certainly expand deficit spending - a figure that in recent years has proved a massive point of contention between Rome and Brussels.

"The EU would likely grant Italy even more leeway to miss its fiscal targets," posited Berenberg Economists Kallum Pickering and Holger Schmieding. But they cautioned that economists cannot predict the severity and duration of a potential medical emergency, only the ability of an economy to recover once the worst is over.

Investors may have to wait some time to know when exactly this economic patient will finally be able to make it out of bed. 

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