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Rare Good News from Europe

And now for something completely different: good news from Europe. A new European Commission report suggests that Italy is “decoupling from Spain” and lists the differences between the two countries.

The contrast is striking. Unlike Spain, the Italian government is not operating with massive budget deficits. In fact, as the FT reports, the Italian government actually ran a surplus last year, if money spent to pay off past debts is removed from the calculation. This surplus is expected to grow to 3.6 percent next  year, putting Italian finances on firmer ground. Meanwhile, the bond market has been kinder to Italy than to its Mediterranean neighbors—its long-term borrowing costs are lower than Spain’s and much lower than Greece’s. And, finally, Italy’s banks are in much better shape, and appear unlikely to require extra capital from elsewhere in Europe.

This is very good news indeed for Europe. While the Greek collapse is a problem, and a Spanish collapse would be significantly worse, an Italian collapse would almost certainly be catastrophic.

Still, Italy’s youth unemployment remains stubbornly high, and the labor market and business reforms that are needed to make the country competitive again are slow in coming. But unlike their neighbors, Italians can see a way forward that isn’t contingent on reluctant aid from elsewhere in Europe. In the current climate, that looks like a victory.

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  • Corlyss

    “Italians can see a way forward that isn’t contingent on reluctant aid from elsewhere in Europe.”

    Perhaps. But they can’t get there from here because of the same social problems that plague Greece. Nobody pays taxes; the pols are equally corrupt; massive off the books markets; sclerotic labor markets comprised of people who all have a relative working for the state as if it were a birthright; intractable unions; and no underlying sense that things gotta change. Good luck with a combination like that.

  • thibaud

    It isn’t news to anyone who actually knows something about Europe.

    Italy’s public debt has always been manageable; its budget is in surplus and its households are very wealthy.

    On top of which, when you combine public and private debt, Italy’s total – about 260 percent of GDP – is far below the American total debt level of 350% of GDP. The Swiss, Dutch and nordics are even lower – far lower – than Italy.

    It’s America that for the last three decades has been running a bread-and-circus, liquidity-fueled economic model that masked fundamental weaknesses with artificially cheap consumer credit. Not Italy or the frugal northerners.

  • Angel Martin

    wishful thinking on the part of the EU:

    CDS spreads for the two counties are similar:

    as are CDS spreads for their largest banks banks

    about all you can say for Italy is they didn’t have a real estate bubble like spain

    markets have given their verdicts on these countries, and that verdict is “sell”

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