Could Italy’s uncertain economic future be a blow to the Croatian economy? While things currently remain decent in terms of Italian liquidity, the way things will play out with the coronavirus pandemic are difficult to predict, and the Croatian economy is already being squeezed without the idea of a major trading partner and neighbour going under.
As Gojko Drljaca/Novac writes on the 20th of April, 2020, more and more analysts and investors are questioning the chances of the now truly enfeebled Italy simply going bankrupt. At the moment, there is no major threat to Italy’s liquidity, as the European Central Bank’s Pandemic Emergency Purchase programme is likely to refinance the country’s needs this year.
However, even before the COVID-19 pandemic, Italy was fiscally poor. At the end of last year, its debt reached 136 percent of GDP. Given that according to IMF estimates, which appear to be somewhat optimistic, Italy’s GDP will fall around 10 percent, this means that Italy’s debt-to-GDP ratio could go up to a concerning 180 percent this year. This is a level of debt that is completely unsustainable for a country like Italy.
Italy can avoid entering into bankruptcy with extensive assistance from the EU or other international institutions, but given the size of the Italian economy and the growing fiscal problems of other European Union member states, it is not certain that the fiscal capacity will be sufficient to save Italy from a very undesirable fate.
There is a possible scenario under which the European Central Bank would buy up unlimited amounts of Italian debt, but it is also not certain that other member states, who are growing increasingly frustrated, would agree to such a monetary policy move, nor is it clear what the effects of such monetary policy would be on the Eurozone as a whole, and on European Union members as well, regardless of whether or not they have introduced the euro as their official currency.
At the EU level, there has been a debate on how to fund recovery. Ursula von der Leyen, Head of the European Commission, is preparing to propose the adoption of a new reconstructed Multinational Financial Framework (MFF) 2021-2027 to EU member states, which would include funding for the recovery from the ongoing COVID-19 pandemic.
Southern members, and France, would much rather see a special financial vehicle outside the financial framework as a proposal on the table. These financial ”vehicles” should be loaded with huge amounts of funds by member states, and launched within just a few months. In either case, if the recovery is to be financed by the MFF- or another sort of special financial ”vehicle”, Italy might make it through this without the need for bankruptcy or radical debt restructuring if the northern EU countries agree to take on its refinancing. The very difficult question is whether the Germans and the Dutch can ”sell” it to their taxpayers.
In this context, it should be noted that Italy is a major Croatian foreign trade partner and anything that goes so drastically wrong in Italy is certain to give the Croatian economy a very unwelcome hit of some level or another. A large number of Italian tourists come to Croatia. In the event of a worsening economic situation (bankruptcy or debt restructuring), the Croatian economy will also suffer a tremendous blow. The COVID-19 pandemic also brings very high-risk external sources for Croatia. There are, as yet, no estimates of the possible consequences of Italian bankruptcy on the Croatian economy, but it isn’t something one likes to imagine.
It should be recalled that this weekend, the French president warned that in the event of financial solidarity with EU member states in the greatest distress, the survival of the EU and the Eurozone could be at stake.
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