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Italy’s Long, Hot Summer

Severe political uncertainty, chronic slow growth, and a sovereign-debt level currently hovering around 160% of GDP already is enough for Italy to trigger a debt crisis. And there is no plausible resolution that would not generate additional risks and complications.

STOCKHOLM – The political upheaval and social unrest fueling the current crisis in Italy should surprise no one. On the contrary, the only uncertainty was when exactly matters would come to a head. Now they have.

Italy’s per capita GDP in 2018 is about 8% below its level in 2007, the year before the global financial crisis triggered the Great Recession. And the International Monetary Fund’s projections for 2023 suggest that Italy will still not have fully recovered from the cumulative output losses of the past decade.

Among the 11 advanced economies that were hit by severe financial crises in 2007-2009, only Greece has suffered a deeper and more protracted economic depression. Greece and Italy were the two economies carrying the highest debt burdens at the outset of the crisis (109% and 102% of GDP, respectively), leaving them poorly positioned to cope with major adverse shocks. Since the crisis erupted a decade ago, economic stagnation and costly banking weaknesses have propelled debt burdens higher still, despite a decade of exceptionally low interest rates.

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