(Broke) Italy “Would Love To” But Can't Pay Its Bills This Year
In most countries, it would be an act of mind-bending chutzpah, or perhaps a display of political insanity, but in Italy it barely made ripples: for a government official, a minister no less, to declare that the country cannot pay its long overdue bills, and not for a month or two, but for the rest of this year! Due to "technical" problems.
The Italian government is out of money. Not that the US government is in any better shape in that respect, or the Japanese government for that matter, but they have central banks that print the missing moolah with lavish abandon. Italy doesn't. It has the ECB which is run by an Italian who promised last year to print with lavish abandon to keep countries like Italy afloat. But that promise is not the same thing as having your own central bank.
On July 4, Italy's budget fiasco came to light once again. Wracked by the pretense of austerity, expenditures rose 1.3% in the first quarter, while revenues remained flat. So the deficit rose to 7.3% of GDP, up from 6.6% last year, bringing the national debt to 130% of GDP. Ballooning debt and deficits in a shriveling economy – Italy has been in recession since the fourth quarter of 2011 – is a toxic combination in the Eurozone.
How will Italy force its deficit under 3% of GDP, the line in the sand that would trigger the Eurozone’s excessive deficit procedure? The government is desperately trying. Economy Minister Fabrizio Saccomanni announced that he’d identified a1,600 “unused” properties that could be dumped. In the near term, this could haul in about €600 million, he said, though former Prime Minister Mario Monti's plan to do that had run aground on the reefs of the declining property market.
In any case, despite appearances to the contrary, "the trend of public finances in the first half is consistent with the achievement of a net deficit of 2.9%," he said. But €600 million, if they materialize, would be a drop in the rusty Italian budget bucket. Much more would be needed.
Hence, a eurocratic deus ex machina: José Manuel Barroso, president of the European Commission, told the European Parliament on Wednesday that the budget rules would be reinterpreted for 2014 so that some public spending on infrastructure projects could be excluded from the deficit figures – something Italy has long pushed for in its valiant efforts to keep its deficit under 3%. If all else fails, monkey with the rules. Abracadabra.
“For countries with high levels of public debt,” such as Italy, “this will be of limited use in the short term,” an EU official cautioned to appease any remaining Germanic deficit hawks. But these kinds of details didn't stop Italian Prime Minister Enrico Letta from declaring victory. “We made it!” he tweeted triumphantly. It would give “more flexibility in coming budgets for countries like Italy” that had their “accounts in order.”
What exactly he meant with “accounts in order,” given Italy’s deficit and debt spiral, remains a mystery – particularly in light of the fact that it cannot even pay its past-due bills.
Beppe Grillo, leader of the opposition 5-Star Movement, has long hammered on this point. In April, during the post-election interregnum, he’d clamored for “the immediate payment of about €120 billion” that the government and public entities owed the private sector.
The government’s refusal to pay its suppliers violates EU rules. But the EU has soft-pedaled the issue, for two very big reasons: payment of arrears would force Italy to sell a truckload of bonds when there might not be any demand; and it would push the deficit way beyond the 3% line in the sand. Thanks to cash accounting, only actual disbursements make it into the deficit figure. Italy has achieved its “austerity” goals by not paying its suppliers. Once again, abracadabra.
But it’s strangling businesses. So, paying a portion of those past-dues, namely €40 billion, has been kicked around. Most recently, Renato Brunetta, leader of the House and member of Silvio Berlusconi’s PDL party, demanded at a coalition meeting that payment be made by the end of the year. In a surrealist show of noble governance, Letta himself jumped into the fray and committed to pay those debts even faster – not in July or August, but sometime in the fall! Rousing applause!
"I would love to" pay the past-due debt of the Public Administration by 2013, "but I don’t know if it can be done," retorted Economic Development Minister Flavio Zanonato the next morning. "It's not ill will, but there is a technical problem,” he said. “The government has removed the obstacle; now all the various sources of expenditure must take action to pay." They don’t have the money, apparently. To say that it’s difficult to pay the debts of the Public Administration is "obvious and true," he conceded.
It would normally be an admission of default. But not for the Italian government. For them, it’s just another illustration of a budget absurdity: staying by hook or crook on this side of the 3% line in the sand – even if it strangles companies and the economy and makes the deficit and debt spiral worse.
Italy has become legendary about tax evasion, which is part of its budget absurdity. So now the G-8 wants to crack down. The first four items at the recent meeting was the need for governments to share information to “fight the scourge of tax evasion.” If only their primary targets were multinationals, banks, and hedge funds. But they’re going after the little guy. Read.... Beware, the Borderless Taxman Cometh
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