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Italy’s Real Problem

The real problem Italy has is that of servicing its enormous debt.  As pointed out in a recent article which appeared on the Der Spiegel website, without its enormous levels of public debt, Italy would be virtually laughing off the current international crisis.

Unfortunately, making the interest payments on Italy’s vast debt mountain is draining Italy’s coffers faster than a thirsty heard of camels at an oasis.  The trouble is that the interest on Italy’s debt may well increase as everyone becomes worried that Italy will stop paying back its debt.  Although Italy’s government is collecting plenty of money from those who bother to pay taxes in Italy, profitable government owned companies and from all the official gambling operations to be found in around 90% of Italy’s coffee bars and tobacconists, all the income is not enough to pay off the interest or pay back debt.

Italy appears to have a strange talent with regard to amassing public debt, which is rather ironic as its population is extremely good at keeping itself out of it!  Corruption and clientelism help Italians fill their bank accounts.  Italy’s public sector tends to use debt to finance corruption and those who win public works contracts are not at all averse to keeping a slice of illicit payments for themselves.  It’s not too difficult to do really.

Here’s how it works:  Local authority A needs a new school.  Builder B is friends with someone who works for Local Authority A.  Builder B agrees a construction price which will be, approximately: building costs, plus “gift” to friend in Local Authority A.  Only the “gift” will be inflated a little so that builder B ends up with a suitably generous profit margin.  The profit margin may also help in the even that other palms need to be greased.  Net result, school which should have cost €10 million, costs €15 million – a €5 million premium. The numbers are mere guesses, but sometimes the illicit cuts may be much lower, other times, much higher.

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Multiply these premiums, as one might call them, by all the public sector contracts which are going begging in Italy and you have one of the reasons why Italy has such a huge level of public debt.  Without all the palm greasing, Italy’s public spending would probably drop by a third and making the payments on the debt mountain would become child’s play.

Tax evasion also helps keep current accounts healthy too.  Italy’s banks do not have vast amounts of debt simply because they are extremely cautious lenders.




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