Question

Italian national debt to GDP is expected to pass 150% in 2020, up from 134% last year. Furthermore, fund managers are getting increasingly more reluctant to buy relatively high-yielding Italian bonds despite European Central Bank’s (ECB’s) backing.

What was the state of the Italian economy in 2019? Use the information given in the question and basic macro indicators to explain.

How has the Covid-19 outbreak affected the Italian economy? Explain how the macro indicators you have chosen at part a got affected as a result of the pandemic.

Answer 1

Situation in 2019 & Key Macro Economic Indicators

As per the information provided in the question, we can conclude that the Italian Economy was going through an extremely tough time as the debt which the government had taken, much of which it owes to the European Union was as much as 134%. Meaning that even the GDP of one full year would not suffice in order for the government to be able to pay off its debts.

Economists also believe that public debt was also rising and investment levels were continuously on the lower side. This led to low economic growth, Gross Domestic Product and Overall Consumption was extremely low. The government on its part could not increase spending by further borrowing as investor confidence remained low, and people were largely reluctant to give away loans to the country as they risked a default on the part of the government.

For any expansion activity i.e. to increase production and consumption, the government requires funds which it clearly is lacking from the issue of high interest and low economic activity. Therefore, we can conclude by saying that 2019 was a dual situation for the government of Italy, whereby it was going through low productivity. demand, supply and Gross Domestic Growth on one hand, and on the other the country has low funds and even lower investor confidence in 2019 therefore,

Situation in 2020: -

The condition of Italy in 2020 has even worsened. As the country was one of the worst hit from the Corona Virus pandemic it resulted in a lot of deaths which would reduce the number of employable people in the country. Further, a large source of the countries revenue directly comes from the tourism industry, the aggregate or total demand for which will reduce and stay so until the Corona situation eases out. This also has a direct impact on all major industries which are interconnected and Italy will lose out on a lot of trade opportunities. For example, local markets gain from tourist footfall which is likely to not happen any time soon.

Therefore, we can conclude by saying, that as major industries remain shut, the aggregate supply as well as demand for Italian tourism and all other major industries is said to go down drastically. The government on the other hand requires funding for health care administration, which it would only be able to fulfil using debt financing. As the debts of the country rise and investor confidence is low, it is a critical situation for the economy of the country.

The Gross Domestic product and overall income of people in the country is stated to decrease even further and this has a large impact on any economic development.

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