Kelli Bauman
MBA 604: Global Economy
March 12th, 2019
Italy’s low productivity growth, weak banks, and high yield rates of Italian bonds have all
contributed to the budget crisis. Low productivity growth is a by-product of Italy’s risk averse
government, cumbersome rules, and long court cases, which cause public investment to remain unspent.
The biggest obstacle to economic growth in Italy is low labor participation, specifically among the youth
and women in their country. Strict labor laws cause employers to resist hiring new employees because it
is difficult to fire them. Additionally, Italy has one of the lowest literacy rates. Outside of budget reform,
education reform could help lower unemployment by increasing literacy and encouraging newly educated
youth and women to join the workforce. Currently, the labor market is strongly controlled by the
government. Labor market reform, such as moving away from a national minimum wage and allowing
company level wage bargaining, would encourage companies to hire more employees, lowering the
unemployment rate.
To finance its current debt, Italy is borrowing money
from the public in the form of government bonds. However,
Italy’s government bonds have been downgraded. Therefore,
they must sell the bonds at a lower price, which increases
interest rates and yield (Figure 1). Additionally, Italian banks
are purchasing government bonds because they feel it is safer
than lending to the public. This is risky because if the
government fails the banks will fail as well, also known as a
“doom loop.” If this “double crisis” were to occur, the European Central Bank (ECB) would have to bail
out Italy, similar to the crisis in Greece. The ECB is concerned because Italy’s economy is significantly
larger than Greece. The ECB is also concerned because the current budget proposed by the Populist Party...
