The Italian economic crisis explained | Looking for Alpha


Italy is facing an existential crisis that threatens the fate of the entire European Union.

In this article, we will look at the evolution of the ongoing crisis in Italy, which really boils down to one major factor. Italy is running out of people.

Population of Italy

United Nations, EPB Macro Research

The problems in Italy are causing chaos across the European Union and resemble the 2012 European crisis centered around Greece. The Italian crisis of 2022 exhibits many of the same characteristics as the Greek crisis of 2012, which are a toxic cocktail of excessive debt, poor demographics and political instability.

Italy is one of the most indebted countries in Europe, with public and private debt equal to more than 330% of GDP.

Italy Debt/GDP

IMF, EPB Macro Research

Most academic research shows that when total debt to GDP exceeds 300%, economic growth begins to fall and living standards begin to decline.

Italy crossed this over-indebtedness threshold around 2010, and its growth began to slow down as expected.

Italy Debt/GDP

IMF, EPB Macro Research

Italy had a dynamic economy in the 1970s and 1980s, with average economic growth in the range of 3-5%.

Real GDP per capita is synonymous with living standards, and when growth is negative, it means living standards are falling and people feel worse.

Italy Real GDP per capita growth

FRED, EPB Macro Research

Starting in 2010, average real GDP growth in Italy turned negative, and they could never escape what is now a clear depression. Italy has maintained negative growth for more than a decade, and there are no signs that a return to growth is in the future.

Political instability is the common result when the standard of living begins to decline. We can see instability emerging in many countries around the world as inflation spikes and erodes people’s purchasing power. The situation in Italy is no different and it is changing at a rapid pace.

Not only does Italy have a debt crisis it cannot solve, it has a political crisis, with Prime Minister Mario Draghi offering his resignation on July 14, 2022.

Italy’s interim president rejected Draghi’s first attempt to resign. A week later, Draghi resigned again after a failed vote of no confidence in the Italian Senate.

A new election is scheduled for September, but until then Italy is essentially acting without anyone firmly in charge.

Italy’s debt burden and resulting political instability are symptoms of a deeper problem… Italy is running out of people.

Population of Italy

United Nations, EPB Macro Research

An economy needs people between the ages of 15 and 64. This is considered the working-age population, and it is critically important to an economy because actively working people consume more, spend more, and earn income that can be taxed to support a country’s debts. .

If there are no or fewer people between the ages of 15 and 64, the country will have fewer workers.

Fewer workers means less income and less tax revenue.

If you have billions of dollars in debt and no tax revenue, then mathematically you cannot sustain or pay off your debts.

Italy’s working-age population is completely imploding. In 2012, Italy shifted from positive prime-age population growth to negative prime-age population growth. An economy simply cannot function when prime-age population growth becomes negative.

Population growth in Italy

United Nations, EPB Macro Research

Projections of the future population growth rate are the real problem.

Japan has long been the poster child for the worst demographics in the developed world, but Italy will overtake Japan in the next 2-3 years and hold the title of worst demographics.

Population growth in Italy and Japan

United Nations, EPB Macro Research

The United States does not have strong demographics, but relative to the rest of the world, the United States is expected to experience positive population growth in the 15-64 age bracket. At the same time, China, Japan and Greater Europe are all negative. This graph shows that Italy has by far the worst demographic profile.

World population growth

United Nations, EPB Macro Research

There is a link between debt and deteriorating demographics, which most analysts do not want to establish. As debt levels rise, economic growth is compromised.

Higher debt acts as a weight around the neck of the economy. This reduced economic growth makes it more difficult for young people to advance in their careers, buy a house and start a family. The result is a delay in family formation, lower fertility rates, lower births and a drop in births. This is a phenomenon that plagues all major countries, because excessive indebtedness has been the political choice for the past three decades, and demographic implosion is the constant result.

The crisis in Italy really boils down to the fact that they are short of people, and without a growing working-age population, there is no tax revenue to pay off existing debts.

This is why the financial markets know that Italy cannot repay its bonds, and the European Central Bank must devise ridiculous policy tools to try to prevent Italian bonds from collapsing.

The ECB knows it needs to raise interest rates to fight inflation in the Eurozone and recently announced a 50 basis point increase in the overnight rate. However, at the same time, they also announced a new policy tool called the “Transmission Protection Instrument”, which basically means that if Italian bonds start to fall, the ECB will buy Italian bonds to prevent the acceleration of what is a secured debt crisis. This is a strange combination of rate hikes and quantitative easing for some sovereign bonds.

Another article on the ECB debacle is certainly in order.

The crisis in Italy is one of excessive debt, political instability and falling living standards, but the root of the problem is a demographic crisis which is expected to accelerate over the next 10 years.

The rest of Europe is not far behind Italy in terms of population cliff, already with negative population growth, but for now Italy is the biggest problem.

Italy’s debt burden is already much heavier than Greece’s in 2012, a crisis that nearly brought down the entire European Union.

European policymakers now face a much larger challenge and one that will simply not go away but will get worse year by year as Italy is simply lacking in population and as a result will see debts escalate a lot. faster than their ability to repay.

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