An Italian debt crisis looms… new threats to the European Union

The looming Italian debt crisis threatens an economic catastrophe for the European Union whose effects may extend to the rest of the world.

Italy is witnessing the harbinger of a major political and economic crisis.

Ten years after the last crisis experienced by the European Union, Italy is in the midst of a debt crisis that threatens the giant bloc, after Italian Prime Minister Mario Draghi announced his resignation from his post, which may threaten to worsen the political and economic situation in the country.

In light of the pivotal role of this man, who is seen as an important figure not in Italy but in the European Union as well, as he was the former head of the European Central Bank and played a role in saving the euro in the European debt crisis in 2012, he was even called “Super Mario”, He was seen by many as a successor to Angela Merkel as the central figure in the European Union, who plays the role of a wise and strong man like her.

Draghi had offered to resign, after one of his fractured coalition parties refused to support him in a confidence vote, but the Italian president rejected his resignation, and Draghi’s future remains in the balance, as the national unity government that has been in power for less than 18 months is exposed at risk of collapse.

And the turmoil experienced by Italian Prime Minister Mario Draghi is reviving fears of the prospects of Italy’s debt crisis.

Just like a decade ago, investors are wondering if some eurozone countries can continue to pay their public debt, which has ballooned during the pandemic and has become more expensive as the European Central Bank prepares to raise interest rates, which means the debt burden will increase, especially on countries heavily indebted as Italy.

Italy was one of the countries in the world most affected by the epidemic, especially in its early stages.

In the wake of the pandemic, Italy’s budget deficit ballooned and its public debt rose to more than 2.7 trillion euros ($2.7 trillion), more than 150% of the size of its economy – its highest level ever, and the highest debt ratio in the eurozone after Greece – on the Although the country’s debt-to-GDP ratio is starting to shrink.

In the previous crisis in the eurozone, the cause of the trouble was the financial excesses that inflicted Greece, Portugal, Ireland and Spain, as happened 10 years ago, but the current economic problem in Italy is caused by weak economic growth.

The problem is that Italy is stuck within the restrictions of the euro that prevents it from using the devaluation of the currency to boost its exports, which in turn affected Italy’s economic growth rates, raising the debt-to-economy ratio, according to a report by the New York Post.

So far, the European Central Bank has kept Italy afloat through its policy of low interest rates and massive purchases of Italian government bonds.

The role of the European Bank has narrowed the difference between yields on Italian government bonds and German bonds, which are seen as Europe’s benchmark bonds; As Berlin is the largest and most stable European economy among the continent’s economies.

But this support from the European Central Bank is about to run out, with European inflation at a record 8.5% and the euro dropping significantly against the dollar, the European Central Bank should stop its bond-buying activities and start raising interest rates to control inflation again, this means a higher cost of debt financing for Italy.

The looming Italian debt crisis threatens an economic catastrophe for the European Union whose effects may extend to the rest of the world, and its effects may affect the Arab world greatly, amid indications of the worsening conditions in many Arab countries already, even before the emergence of this crisis.

“If the Draghi government falls tomorrow, I can’t imagine what will happen,” said Franco Pavoncello, a professor of political science at John Cabot University in Rome.

The victory of the far-right or populist in the Italian elections will greatly affect the situation of the country, just as it happened in 2018, when Matteo Salvini’s anti-immigration League joined the “Five Star” movement against European institutions.

An extreme right-wing government in Italy would complicate matters, in light of the traditional rift between southern European countries that depend on EU aid, and the so-called “thrifty” countries in northern Europe, countries such as Germany, the Netherlands and Austria, which usually demand spending pressure, especially with regard to support for poor European countries in the east and south, because it is the Nordic countries that always pay the cost.

Banks are in better shape than they were in 2012, and Italy’s bonds have an average maturity of seven years, meaning higher interest rates won’t be immediately reflected in debt.

“The economic fundamentals remain consistent with long-term debt sustainability,” Castillo said.

But at the same time, the gas crisis, which may worsen if Moscow cuts supplies, may exacerbate the crises of Europe, especially Italy.

Analysts believe that the scenario of the possible transformation of the Italian debt crisis into a debt crisis in the eurozone is not great, except in the case of Russia cutting gas supplies to the energy-thirsty continent, a possibility that is no longer ruled out at all.

But even in the best-case scenario, the euro is likely to decline, and it will get worse in the event of a possible Italian debt crisis scenario, as economic opinion polls have predicted that in this case the euro’s decline will worsen to previously unimaginable levels.

Only 16% of 792 respondents in the latest Pulse poll expect Europe to succeed in avoiding an economic downturn over the next six months, with 69% betting that the single currency will fall to $0.9 instead of returning to $1.1, according to a report. For the Arabic website from the Bloomberg agency.

But there are others who see little chance that an economically sclerotic Rome can find its way out of the mountain of public debt, says the New York Post.

Why might the world face a more dangerous scenario than the Greek debt crisis?

The possible Italian debt crisis will not only affect the European Union.

There is reason to be particularly concerned about the potential Italian debt crisis compared to previous crises of the European Union.

Unlike in 2010, when the eurozone debt crisis centered on Greece, this time the crisis is likely to be caused by Italy, whose economy is about 10 times that of Greece and is the third largest economy in the European Union.

And if the Greek debt crisis rocked global financial markets in 2010, how much could the Italian debt crisis affect today?

In 2008, we learned how the global economy had become so interconnected, as the bankruptcy of Lehman Brothers, a relatively small US investment bank, shook the global financial system. It also plunged the global economy into its worst post-war recession to date.

This interdependence is the reason why analysts advise US economic policy makers to pay careful attention to external economic problems, and consider the impact of their decisions on the world.

Part of the current euro crisis and the risks that it entails, came as a result of the US Federal Reserve raising interest rates on the dollar to fight the rising inflation unprecedented in the US in 40 years.

But here are the emerging markets and currencies, and even Europe, paying the price for the US decision, which seems completely selfish and aims to ensure the Democrats’ victory in the midterm elections for Congress, without taking into account the interests of the rest of the world.

But any European crisis can quickly turn into a global crisis with repercussions on American shores.

In the same way that the bankruptcy of a US bank in 2008 caused problems for the rest of the global economy, the debt crisis in Europe or in emerging market economies can damage an already troubled US economy.

The potential Italian debt crisis and the consequent wider European debt crisis may trigger a broader debt crisis in emerging markets.

Emerging markets are suffering from a major deterioration in the prices of their currencies, and Sri Lanka has already gone bankrupt, amid fears of a similar wave in many third world countries.

Argentina, Venezuela, Zambia, and others have also faltered, and others are likely to follow suit.

Never before have emerging market economies been as heavily indebted as they are today.

This potential mass default could have a worldwide impact, especially with cryptocurrency and high-risk debt issues in the United States.

Rarely have the economies of emerging countries been hit with such heavy and successive blows before, after the ongoing Covid pandemic came soaring oil and food prices in the wake of the Russian invasion of Ukraine.

In addition to the original emerging market problems, the most significant variable has come from the Federal Reserve’s recent shift to a hawkish stance on monetary policy.

As has happened many times before, high interest rates in the US are already causing capital to be flown back from emerging markets to the US at an increasing rate.

This prompted the World Bank to reiterate its warning that it is only a matter of time before we see a wave of emerging market defaults.

The Arab world, in turn, is at great risk, as the non-oil Arab countries are suffering under the high prices of oil and wheat, as the region is the largest importer of grain in the world, and the debt burden is exacerbating in many Arab countries, and Egypt and Tunisia are holding talks with the International Monetary Fund, to try to obtain loan to save their troubled finances.

Egypt is considered one of the largest countries in the world in terms of the ratio of external debt burdens to the size of the economy, and the situation has been exacerbated by the expansion of national projects, the decline in Russian tourism, and the rise in wheat and oil.

Recently, Egyptian President Abdel Fattah El-Sisi, during his visit to Germany, appealed to Europe to mediate for Egypt with the International Monetary Fund and the World Bank to ease their conditions, in light of the impact of rising wheat and energy prices on the Egyptian economy.

Any loan from the International Monetary Fund, must be accompanied by European, American, and Gulf support, mostly and Chinese as well, in the event that Europe enters into a debt crisis, and even if it is limited to the possible Italian debt crisis, this will affect its ability to support the faltering Egyptian economy, as well as the economies of other countries Like Tunisia, Jordan, and even better off countries like Morocco, where Europe will then be busy rescuing Italy.

What is worse is that the trade of most of the main Arab countries – especially the countries of North Africa, including Egypt – is with the European Union, and the decline of the euro means that the prices of these countries’ exports to the old continent will rise.

Which may lead to a decline in the quantity of these already limited exports.

As for the oil-producing Arab countries, they are not safe either.

Any European crisis may lead to a decline in the continent’s huge oil consumption, and worse, the expansion of the effects of the crisis to North America and Asia, may mean a noticeable decline in oil prices.

Share it...
Live Updates COVID-19 CASES