Italy 2013: A Financial Catch 22

Italy 2013: A Financial Catch 22

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Jun 21, 2013


Italy participates in the ESM, European Stability Mechanism, which is the so-called “EU rescue fund” intended to support the struggling economies in Europe (e.g. Cyprus, Greece, Spain, but also Hungary).

The ESM grants loans at subsidized rates, lower than the market.

Yet, nowadays, Italy is itself a struggling economy and - having a very high public debt - does not dispose of enough resources to put into these funds. Therefore, it borrows such resources from the market at rates higher than those the ESM grant to other States.

So Italy worsens its financial position and, to try neutralize this process, it raises internal taxes with obvious depressive effects on its real economy, which then aggravates its general financial position.

In conclusion, regardless of the alleged political and decision-making advantages the ESM main contributors should have within the EU, the consequences of this policy on Italy’s financial stability appear to be highly negative.

To better understand such vicious circle, consider the highlights contained in the following article recently published (May 2013) on the financial newspaper Il Sole 24 Ore: “[...] Italy has made an additional payment to the ESM, European Stability Mechanism. The share, as reported by Wall Street Italy, is estimated at 2.8 billion euro and can be summed up to more than 40 billion euro down paid by Italy between 2011 and 2012.”

This is in obvious contrast with the other news coming these days, related to the "efforts" that the politics is going to put in place for the Country's economic growth, requesting additional “sacrifices” to the people. While the question is whether or not to suspend the payment of these shares - for the time being - given the dire economic situation of the Country and devote such resources to solve the economic emergency, the share granted to the European Stability Mechanism rises to 43 billion euro, as reported by Paul Cardena, an expert in finance and private bankers of major Italian banking groups. In an article a few months ago, Cardena commented - through a very explicit graph - as from 2010, the year of the outbreak of the crisis, Italy has consistently paid its contribution to the international financial support: 10 billion paid to Member States of EMU (mainly Greece), and then 28 billion in 2011 paid directly to the Fund EFSF (European Financial Stability Facility). Finally, in 2012, with the Government Monti, Italy made additional € 5 billion to the fund ESM: all for a total of $ 43 billion, without considering the last installment just poured.

"Clearly - concludes Cardena - Italy, at the time of payment of such aid did not have the necessary resources and was able to comply by borrowing on the market, at unfavorable rates. To borrow on the markets and therefore attract investors, and assure them on its financial strength (latent), an entire Country has been pressed with taxes, with effects that are highly tangible in the pockets of Italians."

The European Stability Mechanism (ESM), also called bail-out fund, established by the amendments to the Treaty of Lisbon in 2011, is a financial fund for European financial stability of the euro area. A permanent instrument with which Europe has served and will serve to help member states in financial difficulty, paying up to a total of 500 billion euro. There have been numerous criticisms following the birth of this fund, which allocates more power and political decision-making to those states - Germany in particular - who have paid the highest invested capital chunks.”




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