Italian Prime Minister Silvio Berlusconi has resigned amid catastrophic levels of debt that potentially endangered the fate of the entire Euro Zone. Many countries are engulfed by exorbitant public debt that has put mere functioning of government in serious questions from Ireland to Greece. There is an exclusively high rate of uncertainty hovering over the minds of people in and around the Euro-Zone.

The biggest question remains whether Berlusconi’s exit brings good fortune to Italy’s economy and unquestionably to world economic growth prospects in future. Now the fate of the Italian economy solely resides on how effectively President Giorgio Napolitano forms new government under the leadership of Mario Monti a former European Commissioner and most widely discussed candidate for the top post!

The parliament has just passed austerity measures to break the country out of the debt death spiral. The package foresees to save 59.8 Billion Euros from a combination of spending cuts and tax increases.

1 percentage point increase in VAT to 21 percent from 20 percent,stalling of public-sector wages till 2014. Special tax on Energy Sector.They also include increasing age of retirement, reforming employment law, privatizing state corporations and the like.

Austerity measures imply planned reduction in state expenditures on services and benefits in an attempt to reduce deficit spending. Austerity measures does not at all represent moves to realign the fiscal system or to provide with long-term prospective reforms that are needed the most to debt laden countries.

Rather short-term focused which might ultimately prove to provide relief on a marginal scale seriously under representing the whole cluster of fiscal turbulence.

Austerity measures basically tend to lower the intensity of ballooning deficit rather than finding out a constructive and effective way of dealing with it in the future.

According to the Daily telegraph “indeed the euro-zone is reaching a point of no return and it’s becoming a disaster for the global economy in an editorial recently. Pundits also claimed that in order to rescue Italy, almost all the funds in the European Financial Stability Facility (EFSF) would be needed. (1 trillion Euros)

According to Organization for Economic Cooperation and Development (OECD) Gross Italian Debt is up more than 110 percent from the last ten years, in the year 2001 it stood at 120 percent of Gross Domestic Product and even in the year 2005 it was 119.9 percent and again it followed a similar trend in the year 2010 when it reached 118 percent of Gross Domestic Product.

Emma Marcegaglia, head of the Italian Employees association, Confindustria said structural reforms demanded by European Central Bank and European Commission are imminent now, and further said reforms are the only thing that can take us out of current situation.

Image courtesy of the Huffington Post

The real threat to Italian Economy according to a few economists is slow growth rate over the last fifteen years. The above figure illustrates that in the course of fifteen years Italian economic growth rate has been less than the rest of Europe.

Putting any economy back to normal conditions requires stable growth rate and stable growth prospects, these two vital ingredients are missing in Italy’s case, so moving forward into an era of economic unease might continue for quite a few years. The hope is that through these measures, the Italian economy grows at faster rate and the burden of debt is lessened in the near future.

360b / Shutterstock.com

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About the author

Muhammed Faraaz
Post-graduate in Economics from India, unfolding complexities and policies. Proponent of Classical Economics.

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