Italy is facing an existential crisis that threatens the fate of the entire European Union.
In this article, we’ll take a look at the evolution of the ongoing crisis in Italy, which really boils down to one major factor. Italy is running out of people.
The problems in Italy are causing chaos across the European Union and resemble the 2012 European Crisis that was centered around Greece. The 2022 Italian Crisis holds many of the same characteristics as the Greece Crisis in 2012, which are a toxic cocktail of excessive debt, poor demographics, and political instability.
Italy is one of the most indebted countries in Europe, with public and private debt equal to more than 330% of GDP.
Most academic research shows that when total debt to GDP surpasses 300%, economic growth starts to fall, and the standard of living starts to decline.
Italy crossed this threshold of excessive indebtedness around 2010, and its growth started to decline right on schedule.
Italy had a vibrant economy in the 1970s and 1980s, with average economic growth in the 3% to 5% range.
Real GDP per capita is synonymous with the standard of living, and when growth is negative, that means the standard of living is declining, and people feel worse off.
Starting in 2010, average real GDP growth in Italy turned negative, and they have never been able to escape what is now a clear depression. Italy has sustained negative growth for more than a decade, and there are no signs that a return to growth is in the future.
Political instability is the common result when the standard of living starts to decline. We can see emerging instability in many countries around the world as inflation is sky-high and is eroding the purchasing power of the people. The situation in Italy is no different, and it’s devolving at a rapid pace.
Not only does Italy have a debt crisis that they cannot solve, but they have a political crisis, with Prime Minister Mario Draghi offering his resignation on July 14 of 2022.
Italy’s acting President rejected Draghi’s first resignation attempt. A week later, Draghi resigned again after a failed no-confidence vote in the Italian Senate.
A new election is set for September, but until then, Italy is essentially acting with no one firmly in charge.
The debt burden in Italy and the resulting political instability are symptoms of a deeper problem… Italy is running out of people.
An economy needs people aged 15-64. This is considered the working age population, and this is critically important for an economy because people who are actively working consume more, spend more, and earn income that can be taxed to support a country’s debts.
If there are no people or fewer people aged 15-64, the country will have fewer workers.
Fewer workers mean less income and less tax revenue.
If you have trillions of dollars of debt and no tax revenue, then mathematically, you cannot support or repay your debts.
The working-age population in Italy is completely imploding. In 2012, Italy flipped from positive prime-age population growth to negative prime-age population growth. An economy simply cannot function when prime-age population growth turns negative.
The projections for the future population growth rate are the real problem.
Japan has long been the poster child for the worst demographics in the developed world, but Italy will surpass Japan in the next 2-3 years and hold the title for the worst demographics.
The United States doesn’t have great demographics, but relative to the rest of the world, the US is expected to have positive population growth in the 15-64-year-old bracket. At the same time, China, Japan, and broader Europe are all negative. This chart shows that Italy far and away has the worst demographic profile.
There’s a connection between debt and worsening demographics, which most analysts are unwilling to make. As debt levels rise, economic growth is impaired.
Higher debt acts like a weight around the neck of the economy. This reduced economic growth makes it harder for young people to advance in their careers, buy a home, and start a family. The result is delayed family formation, declining fertility rates, lower births, and a baby bust. This is a phenomenon plaguing every major country as excessive debt has been the policy choice of the last three decades, and imploding demographics are the consistent outcome.
The crisis in Italy really boils down to the fact that they are running out of people, and without working-age population growth, there’s no tax revenue to repay existing debts.
This is why financial markets know Italy can’t repay its obligations, and the European Central Bank has to craft ridiculous policy tools to try and prevent Italian bonds from collapsing.
The ECB knows they have to raise interest rates to combat inflation in the Eurozone, and recently they announced a 50bps increase in the overnight policy rate. However, at the same time, they also announced a new policy tool called the “Transmission Protection Instrument,” which effectively means if Italian bonds start to fall apart, the ECB will buy Italian bonds to prevent the acceleration of what’s a guaranteed debt crisis. This is a bizarre combination of raising rates and quantitative easing for select sovereign bonds.
Another article on the ECB debacle is certainly in order.
The crisis in Italy is one of excessive debt, political instability, and a declining standard of living, but the root of the problem is a demographic crisis that’s set to accelerate over the next 10 years.
The rest of Europe is not far behind Italy in terms of a demographic cliff, already with negative population growth, but for now, Italy is the largest problem.
The debt burden in Italy is already much larger than Greece in 2012, a crisis that almost brought down the entire European Union.
Policymakers in Europe are now faced with a challenge much larger and one that will simply not go away but will rather get worse with each passing year as Italy is simply running out of people and, therefore, will see debts accelerate much faster than their ability to repay.
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