Fourth largest economy in Europe falters
We have all been aware of the problems of Greece, Spain, Ireland and Portugal; but how did Italy pop into the picture? It is the fourth largest economy in Europe and has among the highest standard of living in the world. Yet the telltale signs of a potential financial crisis have been in place for a number of years.
Presently Italy has a debt to GDP ratio of 120%, the highest in Europe. However, the country has been able to handle such a high debt as its economy was relatively stable and so were revenues to the government. That is until 2009. At that point the government began to run high budget deficits and unemployment sky-rocketed.
In a recent article in the American Thinker Steve McCann proposed a new economic index which he referred to as the Insolvency Index as an indicator of a nations potential default status:
When high [budget] deficits are coupled with a dramatic increase in unemployment for more than two or three years in a row, that country has embarked on a dangerous road that will lead to insolvency if not addressed quickly.
If a nation wishes to maintain its solvency and continue to expand its economy, it should not experience [budget deficits] higher than 3% of its GDP and, in today's quasi-welfare societies, an unemployment rate above 6 to 7%. On an aggregate basis a combination of these factors should always remain below 10. The higher the index above 10 the greater the problems that country is experiencing and viable solutions to solve these dilemmas will be increasingly difficult to enact.
Where does Italy stand on that basis: in 2009: 13.5; 2010: 13.5; 2011(to date): 16.0. The problem Italy now faces is how to re-finance part of its debt coming due without paying exorbitant interest rates while running large deficits, and how to get those deficits under control. The Italian Parliament has passed new austerity measures but are they enough to solve the problem?
While Italy is not in the same boat with Greece (its insolvency index is: 2009: 24.8; 2101: 20.2; 2011: 24.3) the massive size of the Italian economy and the amount of euros needed to help that country would demolish the reserves of the Euro Zone and cause a potentially catastrophic financial crisis.
By the way the insolvency index for the United States under Barack Obama: 2009: 19.1; 2010: 18.5; 2011: 20.7). The highest since the Great Depression.