FOREIGN TRADE UNIVERSITY MACROECONOMICS ESSAY ITALY’S PUBLIC DEBT AND LESSONS FOR VIETNAM Group members Tran Minh Thuy 1113150044 Do Thi Hai Ha 1113150045 Dang Huyen My 1114150042 Dang Huyen Anh 11141.
Introduction
During the European debt crisis of 2011-2012, Italy emerged as the most threatened ally in the democratic world Its debt crisis is significantly more severe than those faced by Greece, Portugal, and Ireland, as Italy's economy is four times larger than these countries combined With a gross GDP of $2.1 trillion, Italy ranks as the eighth largest economy globally and the third largest within the Eurozone, following Germany and France.
Italy is characterized by the second richest private wealth in Europe – that is, 130,200 Euro savings per capita, just behind France and private debt is well below $10,000 per household
The combination of private wealth and private liabilities puts Italy far ahead of the U.S and most other Western countries in terms of per capita net savings.
The national economy is highly vulnerable due to its significant public debt, which soared to 119% of GDP in 2011, despite being labeled as "too big to fail" amidst the European debt crisis.
There have been many over-alarmist voices about the economic and political situation of Italy on the international scene - both before and after the change of government on November 12, 2011
In the fall of 2011, interest rates on Italian public debt reached unprecedented levels, peaking at 7.3% This surge exceeded the critical risk threshold of 6-7%, ultimately leading Italy to seek assistance under a rescue program.
This article provides a comprehensive analysis of Italy's public debt crisis within the broader framework of the European debt crisis, examining its causes, consequences, and government responses It offers valuable insights into the events that unfolded during this critical period.
Along with that, we also aim at drawing an inferable lesson to
Italy’s public debt crisis
Public debt and its composition
Public debt, which is also referred to as government debt or national debt, is all of the money owed at any given time by any branch of the government
It includes debt owed by the federal government, the state government, and even the municipal and local government
Public debt or public borrowing is considered to be an important source of income to the government
When the revenues a government collects are not sufficient to cover its expenditures, a government usually resorts to borrowing
Such borrowings become necessary more in times of financial crises and emergencies like war, droughts and other disasters …
Public debt can be categorized either as internal (domestic) debt or external (foreign) debt
Internal debt is defined as the financial obligations owed to individuals, businesses, or financial institutions within a country, primarily generated by state or municipal governments These governments typically lack the authority to negotiate with foreign entities, leading to the accumulation of internal debt.
External debt refers to the financial obligations that a government owes to foreign lenders, which can include other governments, international organizations like the World Bank, or foreign financial institutions.
The public debt crisis in Italy
Italy was hit hard by the economic crisis of 2007–2011 The national economy shrunk by 6.76% during the whole period, totalizing seven- quarters of recession
According to the EU's statistics body Eurostat, Italian public debt stood at 116% of GDP in 2010, ranking as the second biggest debt ratio after Greece (with 126.8%).
The IMF predicts public sector debt of 123.4 % of GDP in 2012 By
2013, Italian national debt is forecast to reach 123.8%
Source: Debt and Growth in G7
The figure above shows that Italy has struggled to reduce national debt as a % of GDP since government debt has risen to over 100% of GDP in the late 1980s
2.2 The causes a Poor Performance of Economic Growth
There are many factors that cause Italy to experience a public debt crisis
The first and foremost reason is that since 1990, Italy has experienced sluggish growth
With only small increase in real GDP it has proved difficult to reduce the debt to GDP ratio
Starting in 2001, Italy's GDP growth turned absolutely paltry It finally plunged below zero during the global recession and has barely recovered since
Moreover, the Italian economy has performed badly compared to its Eurozone counterparts
From 1990 to 2004, the average annual GDP growth of Italy was approximately 1.5% (National Statistics) which was a half of that of Spain.
It is unsurprising that growth forecasts have been slashed and
Source: National Statistics Italy is stuck in an unfortunate deflationary debt spiral. b Long Term Tax Collection Problems
A significant factor contributing to the crisis is ineffective tax collection and excessive government expenditure, compounded by corruption and a lack of strong legal frameworks that hinder business growth This environment not only fosters a thriving underground economy but also results in a considerable portion of economic activity remaining untaxed Since 2000, indicators of good governance have consistently declined, highlighting the urgent need for reform.
Economists estimate that Italy's black economy results in a staggering loss of approximately 540 billion euros (£434 billion) due to tax evasion by individuals and companies, accounting for about 35 percent of the nation's GDP In the previous year, efforts to combat this issue led to the recovery of over 12 billion euros.
Italy has experienced a long-term decline in competitiveness, consistently falling below the EU average This deterioration became evident during the first decade of euro area membership, following a prior decade marked by sluggish growth and a slowdown in export dynamics.
Since the late 1990s, Italy has experienced stagnation in productivity, leading to a significant rise in unit labor costs that has resulted in an average annual decline of 3.5 percent in its market shares for goods and services from 2000 to 2009 Consequently, Italy's total market share in global trade has diminished markedly since the mid-1990s, and the country has failed to capitalize on the growing demand in rapidly emerging markets.
Italy is implementing austerity measures, including spending cuts and tax increases, to manage its high public debt These policies significantly impact national income, leading to a contraction in aggregate demand and contributing to the ongoing economic slowdown, which has persisted since the global financial crisis.
Italy's government is currently grappling with the significant challenge of managing public debt, necessitating cuts in expenditure while striving to maintain economic growth The slow response to the debt crisis, compounded by political disagreements, has eroded market confidence, leading to investor concerns about Italy's ability to implement effective actions.
Italy's debt crisis is contributing to social instability as the economy stagnates and slows down The government is implementing cuts to social welfare while salaries remain stagnant despite rising prices, leading to growing frustration and dissatisfaction among Italians with current government policies.
Austerity measures in Italy are resulting in reduced consumer spending, which is contributing to a contraction in the economy This economic decline is causing the unemployment rate to rise, reaching 11.7% in January 2013, up from 11.3% the previous month, marking the highest level of unemployment in over 21 years.
Italy's high public debt has resulted in a significant rise in the yields of its government bonds This increase in bond yields is primarily due to investors perceiving greater risk in investing in Italy's bonds, prompting them to seek higher returns as compensation for that risk.
Investors are increasingly selling off their Italian bond holdings due to concerns over the country's ability to repay its debts This selling pressure drives bond prices lower and yields higher, exacerbating fears of a potential default As the cycle continues, Italy faces greater challenges in refinancing its loans, further heightening the risk of default.
Italy boasts the largest bond market in Europe and ranks third globally, following the United States and Japan, making bond market fluctuations a critical concern A substantial portion of Italian bonds is held by French and German banks, indicating that an Italian default could lead to significant financial losses for these institutions Additionally, the United States holds more Italian bonds than any other country in the eurozone, further highlighting the interconnectedness of the global financial landscape.
Therefore, if Italy were to default on its debt obligations, it would cause massive repercussions globally.
A stable political system is essential for economic growth in any country, and Italy is currently facing significant challenges due to political turbulence and a budget deficit Following years of corruption under Prime Minister Berlusconi, Mario Monti was appointed Prime Minister in late 2011 and has since implemented promising economic reforms Monti's administration has tasked two groups of experts and politicians with the critical mission of fostering collaboration among various political parties to address Italy's pressing issues.
Tax evasion remains a significant issue in Italy, with estimates suggesting that between 25% and 50% of the GDP is concealed from tax authorities In response, the government, under Monti's leadership, has implemented stricter policies to combat this crime The new system introduced by Italy's Inland Revenue agency allows for cross-checking of incomes and expenditures to identify evaders Those caught face substantial fines that contribute to the state budget Additionally, authorities are progressively enhancing penalties to address the broader issue of corruption.
In response to the high unemployment rate, authorities in this country are negotiating with Spain to establish a mutual committee focused on reducing unemployment among workers aged 15 to 24 This initiative is set to be presented to the European Union in June 2013 Additionally, there is a pressing need for Italy to reduce the number of surplus lawmakers in its Parliament, which currently comprises 945 elected members.
630 members (the Chamber of Deputies) and 315 members (the Senate of Republic) If this solution comes into effects, Italia will undoubtedly lessen the debt burden within a shorter time b Economical change
Tourism is a vital sector for Italy's economy, and the government is leveraging its rich historical heritage by transforming ancient castles into hotels This initiative not only enhances the tourism experience but also serves as a potential investment strategy to address the country's significant debt Officials are compiling a list of neglected classical architectural sites, with the ancient prison Stefano, overlooking Gaeta city on Vetotene isle in Naples bay, being a prominent attraction.
Public debt in Vietnam and lessons from Italy
Overview of public debt in Vietnam
The Vietnamese government primarily generates revenue through taxes, with additional contributions from capital income and non-refundable aid Overall, government revenues in Vietnam remain stable, typically accounting for 25-30 percent of the country's GDP.
Government expenses encompass consumption, investment expenditures, and transfer payments Since 2009, total government expenditures have declined as a result of austerity measures aimed at stabilizing the economy.
1.2 Budget deficit and public debt a Budget deficit
Over the past decade, Vietnam has faced significant budget deficits, which are notably higher than those of its neighboring countries However, since 2011, the country has made strides in addressing this issue, successfully offsetting approximately half of its budget deficit.
Vietnam's budget deficit from 2001 to 2011 (% GDP)
Source: Disclosure of State Budget (Ministry of Finance)
World Economic Outlook 2012 (IMF) and Key Economic
1 MOF 1 – international practices (excluding amortization)
2 MOF 2 – Vietnam practices (including amortization) b Public debt
It is considerably difficult to achieve an exact number for the sum of government debt of Vietnam
Vietnam's public debt has significantly surpassed safety thresholds in recent years, but forecasts indicate a downward trend in the country's public debt in the near future.
1.3 Risks related to Vietnam public debt
The Vietnamese Government is challenged by the need to manage public debt without heavily relying on increased tax revenues Additionally, cutting spending could lead to a slowdown in economic growth, complicating the financial landscape further.
In recent years, the depreciation of the Vietnam dong, driven by the global financial crisis, has led to an increase in the country's foreign debt Consequently, this economic instability has caused investors to overlook Vietnam as a viable investment destination.
Vietnam must move away from dependence on foreign debt, as evidenced by recent developments The European public debt crisis, particularly in Italy, has highlighted the potential risks of insolvency, prompting Vietnamese policymakers to reconsider their financial strategies.
Vietnam has long faced challenges such as bureaucracy, corruption, and inefficient government spending To revitalize its economy and restore investor confidence, the country must strategically invest its limited foreign debt.
The inferred lesson from the public debt crisis of Italy
While Vietnam has not experienced a debt crisis akin to Italy's, it is crucial to implement effective measures to address sovereign debt issues to avoid a similar fate This section will explore valuable lessons from Italy's situation, propose necessary adaptations of those solutions, and offer our own recommendations tailored to the challenges Vietnam currently faces.
In Vietnam, the unique political landscape eliminates the necessity for an expert group to resolve financial conflicts between parties, unlike the situation in Italy.
However, we do need to set up a group of economic and financial specialists in order to better consult the Ministry of Finance and the
Government on matters related to sovereign debt.
Besides, although unemployment in Vietnam is not at an alarming level, the rate of highly-skilled and educated workers is rather low
Therefore, capital resources should be reallocated so that education becomes our focus, through acts such as general education be made compulsory and career orientation be provided for every student
To effectively address public debt and budget deficits, it is essential to promote transparency regarding government budgets and public debt, as emphasized in the IMF's 2007 Manual on Fiscal Transparency.
It is essential to differentiate the government sector from other public sector entities and the broader economy Furthermore, the roles related to policy and management within the public sector must be clearly defined and made transparent to the public.
To ensure effective governance, it is essential to clearly define the fiscal powers of the executive, legislative, and judicial branches of government Additionally, responsibilities must be appropriately allocated among each organization and sector This can be achieved by enhancing the budget system law or amending the constitution.
The relationship between the general government and state-owned enterprises (SOEs) needs to be transparent as well, especially on public finance
The issue of how profits from public corporations should benefit the government necessitates a clear and logical response State-owned enterprises (SOEs) are required to publicly disclose their financial statements, ensuring transparency regarding their profits and the portion subject to taxation.
Likewise, government spending on behalf of public corporations must appear in government budget statements as well as in these enterprises’ financial statements.
2.2 Increasing government revenues and decreasing government spending
Vietnam faces a budget deficit and a high public debt, despite a significant government revenue ratio This situation arises from excessive public spending focused on recurrent expenditures rather than investment and development To address these issues, Vietnam needs to effectively reduce and reallocate its recurrent expenditures, beginning with a cut in the cumbersome administrative mechanisms that hinder economic progress.
Privatizing certain segments of the public sector, including education, public transport, and information services, could enhance efficiency; however, such cuts must be strategically planned to avoid adverse effects like increased unemployment Drawing insights from Italy's experience, extending the retirement age can help mitigate these issues while also easing the financial strain of pensions on the government budget.
Many countries have implemented policies aimed at reducing budget deficits and public debt, with European nations notably adopting austerity measures to address the ongoing debt crisis in the region.
To enhance government revenues in Vietnam, several viable strategies can be implemented, including raising tax rates or VAT, introducing new taxes on harmful and luxury items, as well as on high-value real estate and assets Additionally, the government could adopt a progressive taxation system to impose higher taxes on individuals with elevated income levels.
To address the budget deficit and boost demand for domestic goods and services, it is essential to reduce domestic tax rates while increasing tax rates on major importers such as China, India, and Korea.
The implementation of these policies must be approached with caution to prevent public backlash and social unrest With careful management, Vietnam can effectively address its budget deficit and high public debt levels.
Vietnam's economy faces significant challenges due to ineffective government debt and investment, which fail to deliver sufficient returns This inefficiency in fund utilization has a profound impact on the overall economic landscape.
The increasing number of large corporations declaring bankruptcy is heightening concerns among both domestic and foreign investors This surge in bad debts could compel the government to allocate its budget for payments, resulting in more significant deficits.
Moreover, public investment in Vietnam has been taking over private investment, while ICOR of Vietnam in the period 2010-2012 has been on the upward trend, indicating ineffectiveness of investment
Therefore, the restructuration of the SOE system and the enhancement of public investment efficiency need to be prioritized in alleviating
To effectively restructure State-Owned Enterprises (SOEs) and combat corruption within government operations, it is essential to implement new administrative regulations Establishing a free and competitive market for CEOs can help minimize bureaucratic hurdles Additionally, SOEs must ensure transparency by disclosing information and documents related to their activities.
Tourism, as we can see from the case of Italy, has become a major industry in times of economic crisis
Conclusion
The Italy’s public debt crisis results from loose management of Italian government, which includes flaws in long-term tax collection, high labor cost and poor performance of economic growth
The ongoing crisis results in social instability and economic decline Drawing lessons from Italy's experience, Vietnam must implement prudent policies to manage sovereign debt and avoid a similar debt crisis.
By conducting this research, we intend to provide readers a profound look into Italian public debt crisis, from which we infer valuable lessons for Vietnam
Despite our extensive research efforts, we acknowledge that some shortcomings may arise due to our inexperience in this area We appreciate your understanding regarding any limitations and welcome your feedback, which will help us improve and conduct more rigorous research in the future.