Abstract

The case discusses the economic turmoil that Italy was experiencing in 2019 due to huge public debt and long-term economic underperformance. Italy was among the worst performing countries in the eurozone, and several austerity measures had been imposed on it by the European Union. The people of Italy were against such measures, and the political party which had ruled the country for several decades lost the elections in 2018 and an anti-establishment coalition formed the government. To fulfil the election promises like minimum income for the unemployed, tax cuts, etc., the new government came up with a high-spending budget. The announcement had repercussions for the European markets, and the EU opposed the budget fearing an existential threat to itself. Failure to discipline Italy would be seen as the EU’s failure, and further austerity measures would sour the relationship between the EU and Italy. The European Commission rejected the draft budget, asking Italy to reconsider the plans, and Italy agreed to reduce the deficit target. But this failed to find a long-term solution to the problem the country was facing. Going forward, it remained to be seen whether the populist government could maintain a proper balance between ensuring the growth of Italy’s economy and restoring the interests of the eurozone member states.

Learning Objectives

The case is structured to achieve the following Learning Objectives:

• Understand the impact of political turmoil on the economic situation of a country.
• Understand what an expansionary fiscal plan is and its repercussions for a country’s economy.
• Explore how populist budgets can impact the economy.
• Study how fiscal policy is determined in the case of countries with high debt.

Keywords

Public debt; Sovereign debt; Economic progress; Austerity policies; Recession; Economic stagnation; Financial crisis; Political instability; Fiscal stability; Anti-establishment government; Anti-euro coalition; Populist government; Expansionary budget; high-spending fiscal plan; fiscal stimulus plan