Tags: Feldstein | Italy | Save | euro

Feldstein: Italy Can Still Save Itself, the Euro

Friday, 02 Dec 2011 08:13 AM

Economist Martin Feldstein says Italy can save itself and the euro as well.

"Italy can save both its own economic sovereignty and the euro if it acts decisively and quickly to convince the financial markets that it will balance its budget and increase its rate of economic growth so that the ratio of its public debt to its gross domestic product will decline in a steady and predictable way," Feldstein writes in the Financial Times.

"If markets have confidence in that, Italy’s interest rate could decline to the four percent that it paid before the crisis began."
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Unlike Greece, Italy is in a good position to achieve this, says Feldstein, because it has a “primary budget surplus,” with tax revenues exceeding total non-interest government outlays.

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Also, Italy can eliminate its small overall budget deficit if it cuts spending and raises revenue by a total of just three per cent of its GDP – an amount not impossible to find in a public budget that now equals 50 percent of GDP.

"The country also has a positive growth rate of about one per cent per year," Feldstein says. "If reforms to strengthen incentives and reduce regulatory impediments raise that growth rate to two per cent, that together with a long-term balanced budget would cause Italy’s public debt to decline from today’s 120 percent of GDP to about 65 percent over the next 15 years."

However, Feldstein notes, a decision by Athens to leave the euro and default could cause a run on the euro and on Italian debt in particular.

“That’s why it is so important for Italy to stress that its conditions are totally different from those in Greece, and that its new policies will soon produce budget balance and a declining ratio of debt to GDP,” he says.

“Italy … does not need assistance from Frankfurt, Brussels, or Washington,” says Feldstein. “The proposed policies for help from the European Central Bank, the European Commission, and the International Monetary Fund would ultimately weaken Italy and undermine its economic independence.”

The New York Times reports that Moody’s Investors Service has warned of rising prospects for multiple defaults by countries in the euro zone and credit rating downgrades of nations across Europe if leaders should fail to resolve the spreading debt crisis.

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Economist Martin Feldstein says Italy can save itself and the euro as well. Italy can save both its own economic sovereignty and the euro if it acts decisively and quickly to convince the financial markets that it will balance its budget and increase its rate of economic...
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2011-13-02
Friday, 02 Dec 2011 08:13 AM
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