The crisis, we know, is a global one. The recession is hitting the US, Europe and Latin America hard, and is not sparring Asia, with China now heading towards a recession. It is not surprising therefore that governments around the world, having bailed out banks and insurance companies, are now implementing fiscal “anti-crisis” packages to help firms and consumers endure the storm. These packages range from1-2% in France and UK, 3-3.5% of GDP in Spain, Germany and Switzerland, 7% in the US, up to 16-18 point of GDP in Japan and China, and… 0.2% in Italy and 0.01% Greece! (Source: Morgan Stanley, except Greece (web)) The standard justification for this Italian (and Greek) “anomaly” is, of course, the huge Italian public debt, above 106% of GDP and rising. Italy, it is argued, would not stand a further increase in spreads: a roll-over crisis would trigger a disastrous default. But how far does the debt burden go in explaining the “XXs” size of the Italian package? Not too far. In graph 1 I plot the magnitudes of the rescue package against the debt-GDP ratio in 2008 (source Weo, IMF). With the exception of Japan, the plan tends to be smaller, the larger the debt burden. On average, if one excludes the Asian countries and draws a regression line (Graph 2), a 1 percentage increase in the debt burden is associated to a 1/3 percentage fall in the size of the rescue plan (sorry, only 10 observations). Taken literally, this implies that a “representative” country with the same debt burden of Italy would be expected to implement a 0.8% GDP package, about 4 times the one put in place by the Economy Minister, Mr Tremonti. There are three possible explanations to this puzzle (or a combination of them). 1) The economic recession in Italy is about four times less serious than in most countries (false); 2) The economic package of Mr Tremonti is about four times more effective than the ones of other countries (false); 3) Mr Tremonti himself, previously known as the inventor of “creative accounting” in public finances, has turned into a fiscal conservative devotee (meaning about 4 times more conservative than his peers)!
(for more on this topic see my blog (in Italian): paolomanasse.blogspot.com).