High national debt: is Italy triggering a new euro crisis?

Italy is increasingly worrying economists in Europe. Because with rising interest rates, the high national debt is harder to bear. Is a new euro crisis looming?

Italy has to endure a lot of negative headlines at the moment. Yesterday the government in Rome declared a state of emergency due to drought in five regions. At least seven people died when a glacier broke off in the Dolomites. And Italy’s still high level of debt reminds many observers of the debt crisis ten years ago. “The mountains of debt in Italy are still very, very high,” warns economist Marco Wagner from Commerzbank. “We have a national debt of around 150 percent of gross domestic product, and the Maastricht limit is 60 percent of gross domestic product. Italy is well above that.”

ifo boss Fuest is alarmed

Italian Prime Minister Mario Draghi must therefore fight on many fronts. After all, today it became known that the Italian economy has grown slightly. However, Italy had to pay more than four percent at times if it wanted to borrow money on the financial market. The head of the ifo Institute, Clemens Fuest, has therefore raised the alarm. The euro crisis is back, he said given the high debt levels in Italy and Greece. Commerzbanker Wagner, on the other hand, sees no risk of contagion for the rest of the euro area. “I think you have to leave the church in the village at this point,” he says. The yields on ten-year Italian government bonds are currently at 3.2 percent; that is far removed from what one had to experience in times of the national debt crisis. And: “The yield gap between Italian and German government bonds over a ten-year period is just two percent,” says Wagner.

Carsten Brzeski, chief economist at ING-Bank, also thinks the comparison to the euro crisis ten years ago is exaggerated. “We have European funds, we have European institutions, we have rescue packages. So we have enough instruments to deal with a euro crisis.” According to Brzeski, the states are in better shape today than they were then.

Can the ECB play “fire brigade” again?

Despite this, a fierce discussion has broken out within the European Central Bank as to whether and to what extent the bank should support countries that are still highly indebted. Targeted purchases of government bonds are once again under discussion. Bundesbank boss Joachim Nagel warns against such purchases, and ING economist Brzeski also does not see the ECB in the role of crisis fire brigade this time. “If the ECB takes over this role again, it will be incredibly complicated,” warns Brzeski. Because unlike during the euro crisis, during which there was an extremely loose monetary policy paired with low inflation, the ECB now has to fight higher inflation. “Playing a crisis fire brigade and at the same time raising the key interest rate is an eerie task,” said the economist.

The Governing Council of the ECB will meet again on July 21. The interest premiums on Italian government bonds will certainly play a larger role there.