TIME: Almanac 1990/1990 Time Magazine Compact Almanac, The (1991)(Time).iso/time/101689/10168900.016

Text File | 1990-09-19 | 4KB | 73 lines

BUSINESS, Page 58

La Dolce Deficit

Untroubled by its debts, Italy sails serenely on

By Robert Ball


    Everyone knows how bad the U.S. budget deficit is. How it rolls
like a tidal wave of red ink over the Administration and Congress,
undermining the dollar, pushing up interest rates, shaking the
international monetary system and threatening to put future
generations of Americans in hock to foreigners forever. How,
whenever moneymen gather, finance ministers moan, central bankers
chide, and all stare in horrified fascination. How could America
get itself into such a mess?

    Now imagine a country that regularly runs annual budget
deficits five times as bad as those of the U.S.; whose fiscal
policy is so paralyzed by political rivalries that its national
debt is equal to its gross domestic product (vs. only 50% for the
U.S.); whose debt problem is so out of hand that interest payments
alone amount to 8% of GDP. Compared with this, the U.S. seems
almost a model of fiscal probity.

    Such profligacy must bring retribution, one would think. Yet
Italy goes serenely on, racking up an enviable economic record and
attracting little international criticism or even attention.
Perhaps insolvency resides in the eye of the beholder, for there
can be no doubt about the numbers. Italian governments have been
abusing their credit cards for 20 years, piling debt onto debt.
Only once in the past dozen years has the annual budget deficit
been less than 10% of GDP. By contrast, the worst U.S. ratio was
3.8% in 1983; last year it was only 1.8%. Moreover, most of Italy's
debt is short to medium term, subject to volatile interest rates.
A 1% rise in short-term rates costs the government 7 trillion lire
($5.1 billion) annually in extra interest.

    The Italian economy, however, ignores the problem. For the past
six years, its annual growth rate of 3.5% to 4% has been one of
Europe's highest. Inflation has come down smartly from more than
20% in 1980 to 5% last year. The lira has appreciated against most
other currencies. To be sure, interest rates are still in double
figures, and unemployment is stuck above 10%, but that figure is
skewed by a higher jobless rate in the backward south; in the
thriving north, it is lower. Overall, Italy's economic performance
is sparkling. How do the Italians do it? Is this a real-life film
with Marcello Mastroianni as governor of the Bank of Italy?

    Even sobersided economists accept that there is something odd
about the Italian experience. A recent scholarly study, The Italian
Miracle, does smack of the supernatural compared with the German
miracle, which was 99% hard work. But there are rational elements.
Italians are great savers, squirreling away 15% of income, much of
it in government securities. Fully 97% of the national debt is
funded domestically, and nearly two-thirds of the negotiable state
debt is in the hands of individuals. This mode of saving doubtless
owes something to exchange controls and preferential tax treatment,
but Italians have been willing buyers of state paper, thus
absorbing the burgeoning debt. In this situation, rises in interest
rates have the perverse effect of stimulating consumption by
putting more money into people's pockets. Moreover, another part
of the government's deficit spending directly helps private
business by shouldering part of employers' social-security
contributions, thus boosting profits and encouraging investment.

    Benign as the experience has been so far in this fiscal
wonderland, the present Italian government is determined to blow
the whistle. Prime Minister Giulio Andreotti has framed a budget
strategy that aims at balancing the books by 1993 through a
combination of tax increases and spending cuts. Similar targets
have been set and missed before, but this time a new sense of
urgency comes from the danger that Italians may start sending their
savings abroad when capital movements in the European Community are
freed next year. Bank of Italy Governor Carlo Ciampi warns that "a
change in the handling of public finances is mandatory," because
"every delay increases the burden on us and on future generations."
That's not Mastroianni talking.