Precisely where Italy’s indebtedness and borrowing costs will settle after the energy crisis is uncertain. Our table shows a range of combinations for debt and financing costs, and what they would imply for the country’s budget were growth to match the average imf forecast during 2022-27, and were inflation to fall to the European Central Bank’s target of 2%. In reality, the average tenor of outstanding Italian debt is nearly eight years, so it would take time for its average financing cost to rise to the levels shown on the right-hand side of the table.
At financing costs of 3% or below, Italy can run small primary deficits and still outgrow its debt. (The table also shows one weird effect of growth exceeding interest rates: that debt stability is easier to achieve when starting debts are higher.) As interest rates rise, however, stability requires primary surpluses of 2% or more. The only time Italy has run so tight a budget since the global financial crisis was in 2012, at the height of European austerity.
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