Economics: Europe’s Italy problem returns

Italy’s debt dynamics now look a concern under most scenarios

Italy entered 2022 with a lot to be encouraged by. But a lot has changed in the past few months. Rising recession risks and the ECB’s hawkish turn have sent yields sharply higher. Italy’s debt dynamics once again look concerning.  

It’ll fall on the ECB to (once again) find a solution in the short-term 

Reducing Italy’s long-term vulnerability to yield spikes won’t be easy. Boosting potential growth will help. The real gamechanger would be a rewrite of the European fiscal framework – but that seems a way off. It’ll fall on the ECB to find a short-term solution.

Striking a bargain with the hawks will be tricky in the current environment

The ECB’s prior programmes have only succeeded when virtually unlimited, and with loose conditions attached. Agreement was difficult enough with core inflation below target. But at 4%, and with policy tightening, it’ll be a much harder sell for the hawks.