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Bringing Italian debt under control
By Oren Laurent
President, Banc De Binary
On Friday, the state of Europe’s economic recovery was up for discussion again as Italy's cabinet approved plans for the privatisation of several of its assets in an attempt to reduce the staggering public debt.
The government will make private up to 40% of the postal service and 49% of the air traffic control agency. Together this could generate close to 7 bln euros.
According to Italian Premier Enrico Letta, the privatisations in 2014 will effectively bring down public debt for the first time in six years. Recovered capital will go towards reducing payroll taxes and fund expenditure projects, thus giving a boost to the economy. The European Commission has indicated that if Italy succeeds in lowering debt this year, it will be granted greater budget flexibility with regards to future investments.
It is certainly not a bad idea, especially if shares are made available to current post office employees and the money generated is pumped back into the economy. Yet analysts have pointed out that privatisations on this scale will only have a marginal impact on the overall debt. Currently, Italy has a public debt of 2.1 trln euros, giving it a debt ratio of 130% of GDP, the second highest in the Eurozone after Greece.
Against 2.1 trln euros, the 7 bln seems somewhat insignificant. What impact will these privatisations really have?
Consider that the decision comes at a crucial time for Italy, which is on the verge of exiting a double-dip recession. Take this proactive measure as part of the picture of government determination for reform, and you’ll see that it has greater importance than the single value of privatisation.
Thanks in particular to increased exports and domestic demand, the prolonged decline in GDP has come to a halt and fiscal growth is expected to rise. The Bank of Italy estimated that GDP will grow by 0.7% in 2014 and by 1% in 2015. However, employment is likely to remain high and a tight budget will remain necessary.
The plan for privatisation is a sign that Italian politics has stabilised and that the government is now managing the budget seriously and guiding the country towards a recovery; Letta is finally taking decisive action, having made limited economic progress since taking office nine months ago. It comes after a series of positive economic data and at the same time as the cabinet decided to encourage citizens to declare illegal funds held in foreign banks, by reducing the sanctions they will face, another step towards raising funds.
Unquestionably, there is a long way to go until the deficit is sufficiently controlled and Italy can confidently celebrate a full economic recovery. Yet the current plans are indicative of a change of tone and economic progress. Stop sneering at the relative scale. We all have financial goals and we all have to start somewhere. Italy is no different.
