Italian families are not rich enough to escape a crisis
It’s reassuring at a volatile time. But don’t expect wealth to provide a panacea for structural weaknesses. Two decades of stagnation mean that Italy’s strengths are no longer what they used to be.
Right now, the country’s borrowing costs are rising. Market pressure on the country’s sovereign debt widened the spread between the Italian 10-year BTP and the German Bund to levels that risked being unsustainable; which led the European Central Bank to call an emergency meeting to commit to creating an instrument to close yield gaps.
Seeking to allay financial fears, right-left politicians in Italy are suggesting that family wealth in itself negates the danger of national debt. That is not exactly correct. However, there may be ways to reinvest some of this capital back into the economy.
Some sort of wealth tax is the most obvious method, in part because much of the largesse is the result of the country’s high rate of tax evasion. “What Italians saved in unpaid taxes was invested in buying houses,” says Luigi Guiso, professor of household finance and insurance at the Einaudi Institute of Economics and Finance. A tax of, say, 1% on the value of homes and bank deposits can be a remedy if the state urgently needs more money. And the current government is ideally placed to begin small steps toward a wealth tax: it is led by a technocratic economist — Mario Draghi — who is not seeking re-election.
But there are obstacles. On the one hand, putting a price on assets in order to tax them is fraught with pitfalls. Italian wealth is split fairly evenly between financial instruments – including Italian sovereign bonds and US Treasuries – and real estate, according to data from the Bank of Italy. But property in Italy, which is often held in a family from generation to generation, is notoriously difficult to assess. Even Draghi battled opposition within his coalition government to a cadastral reform that would have made Italian real estate easier to value.
Politicians know that if a clear valuation of Italian assets becomes law, it’s just a small step towards a wealth tax coming into force – and polls show (surprise!) voters universally hate it. the idea.
And there are political ramifications. If the government passes a levy, it could well bolster support for the far-right Brothers of Italy party, led by Giorgia Meloni, which is the only major opposition party to Draghi’s coalition. A wealth tax could also crowd out the middle class, the mainstay of mainstream politicians. Indeed, the wealthiest individuals have already relocated their assets, as evidenced by the popularity of Luxembourg or Monaco as the domiciles of Italian family businesses.
Italian wealth is also illusory. Yes, it’s higher than ten years ago, but it’s actually on a downward trend if you look at it over the past 15+ years, a period in which Italian economic growth has stagnated. and productivity has shrunk. Unless Italians start saving again, it’s not going to increase any further. Indeed, the long-term data trend suggests continued household impoverishment. Italians will not be able to maintain their standard of living without liquidating more and more of their assets, says Alberto Albertini, vice president of Ersel, a private bank.
Besides inflation and soaring energy bills, there are other pressures. Corrado Passera, a veteran Italian banker who runs a fintech called Illimity that buys distressed debt, notes that there are 280 billion euros in loans that have seen their credit risk increase since their initial issuance. It is fair to assume that most of this aggravated debt has been incurred by small and medium-sized family businesses – the backbone of the economy. Widening spreads threaten to make it more expensive to refinance these loans. Of course, not all of these troubled borrowers will be able to repay their debts. But some will.
It’s all good for Passera’s business. But, for almost everyone – Draghi and Italian families included – it’s another looming crisis: a “catastrophic loop” where volatility in sovereign debt spreads undermines the banking sector through its loan portfolios.
Italy’s chronic failure to stem tax evasion, boost growth and productivity, and reduce its debt over the decades has brought it to this crossroads. A wealth tax could have helped, but that time is over. The economic crisis is now too big a problem for Italian families. We have to hope they don’t go too far to the right to find a solution.
More from this writer and others on Bloomberg Opinion:
The woman who could lead Italy to the far right: Rachel Sanderson
Italy’s romance with meritocracy has been a recurring, recurring one: Adrian Wooldridge
If anyone can lead Europe after Merkel, it’s Super Mario: Andreas Kluth
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