On Friday, the Italian Senate passed a package relating to austerity measures in order to diminish fears of a potential debt crisis. The measures were approved by a vote of 156 to 12; however, this does not mean that the package will be put into effect yet because the Chamber of Deputies still has an opportunity to vote against it. Italy is the fourth-largest economy in Europe, but has one of the highest national debts in Europe as well. Many fear that Italy will suffer the same fate as Greece, in terms of finances, if they continue on the path they are on now and do not take the correct measures to remedy the potential debt crisis that is looming over their heads.
Italian President Giorgio Napolitano has said that “an interim government will be formed [after the reforms pass] or elections will be held.” The current Prime Minster, Silvio Berlusconi, is expected to step down if the measures are adopted, and Mario Monti is projected to take his place. Monti is a former EU commissioner, who held that position for ten years. This past week he met with President Napolitano and was appointed as a senator for life. Berlusconi seemed to show no ill will towards Monti based on the fact that he voiced his support of Monti on his Facebook page, where he congratulated Monti on his senator for life appointment.
What are Italy’s options for reforming their current financial structure? Do you think the reforms will prevent a potential financial collapse or is it too late for Italy? Do you think any of the remedial measures taken in America have been effective, and should be considered by Italy?
Source: CNN.com
I think the major obstacle for Italy is the the Italian lifestyle itself. “La Dolce Vita” means short working hours, entitlement programs, etc. My in-laws have a large number of family members still living in Italy and we’ve often conversed about the differences in the American and Italian lifestyle. What I’ve gathered is that there is not much motivation to pursue higher education, etc. in Italy because in the long run, for example, a mailman can live just as comfortably as a lawyer. Obviously, that type of comparison paints with broad brush strokes, but it does underscore many of the problems Italians face–particularly entitlement programs.
Its easy to say “increase the requirements for pension entitlements, etc.,” but its not as easy as waving a magic wand. A change of that magnitude would fundamentally shift what generations of Italians have known and have looked forward to. Were Italy to take these measures, its not at all inconceivable for them to expect riots and protests similar to the ones that took place in France when the minimum retirement age was increased…to 62!
http://www.nytimes.com/2010/09/16/world/europe/16france.html
Milton Friedman once said that the easiest (and quickest) way to spend money is when a person spends other people’s money on someone else. This is because, in such a scenario, the value of the dollar is not maximized due to the fact that the spender doesn’t have much at stake. This is precisely the problem that politicians have when it comes to following a budget. That is, politicians don’t exercise their spending power judiciously because they are not spending their own money.
In addition, politicians spend money with a mind toward their constituents and the next election. Unlike a business or even a teenage kid saving for his first car, politicians rarely ever think long-term when it comes to allocating a budget. This is because, generally, making cuts isn’t popular and an unpopular candidate is not an electable candidate.
Thus, Italy and the United States (and many other countries) find themselves in the financial predicament that they are in today. Perhaps the only way politicians will spend less is if they have less to spend.