Italy is the eighth largest economy in the world and the second-biggest manufacturing economy in Europe.

The Italian government's tax collections from year to year have been near rock-steady as a percentage share of the country's GDP and, for over a decade now, the country has been running comparatively small annual budget deficits.

And yet, the Italian government is now behaving as if its financial situation is so dire that the nation itself is in imminent danger of going under.

How exactly does that happen?

Italy Government Spending and Tax Revenue per Capita vs GDP per Capita, 2000-2011

 

The short answer is that Italy is burdened by the policies of its past. In the 1980s, the nation began running up a truly phenomenal national debt in a short period of time, peaking at over 120% of the country's GDP in 1994, before falling back to be below 105% of GDP in 2007. Since then, it has ballooned back over 120% of GDP.

Italian Government Debt (% of GDP)

Starting from such a high level, Italy had little room to be able to absorb the impact from financial crises within its borders, such as the one driving markets today, where the Italian province of Sicily is at risk of defaulting on its own public debts and obligations.

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8 Comments So Far
Blair31 Wrote: Jul 30, 2012 10:51 PM
When companies and cities are in debt, they declare bankruptcy. When governments are in debt, they print more money.
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David4 Wrote: Jul 30, 2012 1:07 PM
The article: "Lenders respond to that situation by demanding higher interest rates on the money they loan to the government."

That is worth some more words. That irresponsible situations causes would-be lenders to reconsider. Some take their money someplace else and lend it to other more responsible governments. The law of supply and demand then means that the remaining lenders can demand, and get, higher interest rates on the money they loan to example=Italy.
-- The reason why we are not seeing it so far with the US Govt. is that there are very few other places to go, and lenders are coming to the US as the alternative to bad Europe. Supply and demand. But lose and not repay enough money and supply WILL go down.
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Kibitzer Wrote: Jul 30, 2012 11:03 AM
All Ponzi schemes ultimately collapse. Debt financing of government is a Ponzi scheme, since the politicians have no plan to ever actually pay off the debt, but rather roll the debt over by paying old lenders with funds from new lenders while adding more debt to fund their irresponsible spending.
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Charles SWVA Wrote: Jul 30, 2012 10:43 AM
When debt finally overwhelms Sicily & Italy, when the sun comes up the next day, there will still be Italians, they will still be eating and drinking and traveling. The propaganda machines and the bankers will be having duck fits. Life will go on - except for the few bankers that commit suicide.
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Kibitzer Wrote: Jul 30, 2012 11:09 AM
The financial collapse of Sicily and Italy will mean as a minimum severe curtailment of the socialistic benefits to their citizens, since those governments will no longer be able to pay for them with borrowed money.
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U.S. Vet Wrote: Jul 30, 2012 9:59 AM
Still think that all those Taxes are Funny, And knowing that none of those Taxes were around 100 years ago & yet our Nation was the most Prosperous in the World.We had absolutely no National Debt,Had the Largest Middle Class in the World,And Mom stayed home to raise the Kids.
What the Heck Happened ? Can You Spell Politician ? Im a 26 year veteran,I don't portray to be some Rhode Scholar but Im know enough to understand that 535 Politicians weather Democrat or Republican are Responsible for every problem that Plagues this Country, Its time for a new Policy (Re-Elect no one !) Politicians & Diapers should be changed often,and for the same reason.Im Tired of the Stupidity and Repulsed by the Vitriol of American Politics
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U.S. Vet Wrote: Jul 30, 2012 9:30 AM
Government Taxes= Accounts Receivable Tax,Building Permit Tax,CDL License Tax,Cigarette Tax,Corp Income Tax,Dog License Tax,Excise Taxes,Federal Income Tax,Fed Unemployment Tax,Fishing Lic Tax,Food Lic Tax,Fuel Permit Tax,Gas Tax(44.75 per gallon),Gross Receipts Tax,Hunting Lic Tax,Inheritance Tax,Inventory Tax,IRS Interest Charges Tax,Liquor Tax,Luxury Tax,Marriage Lic Tax,Medicare Tax,Personal Property Tax,Property Tax,Real Estate Tax,Service Charge Tax,Social Security Tax,Road Usage Tax,Recreational Veh Tax,Sales Tax,School Tax,State Income Tax,State Unemployment Tax,(7) Telephone Taxes,Utility Taxes,Vehicle Lic Tax,Vehicle sales Tax,Watercraft Reg Tax,Well Permit Tax,Workers Comp Tax, Not one of these taxes existed 100 years ago.
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olddog39 Wrote: Jul 30, 2012 6:14 AM
Over 50 years of the US not paying on the principal of our debt (old debt) puts us in the same position. We need to stop adding to our total debt load or we face the same consequences.
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