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August 7, 2013

If You Think Europe Is Fine, Look at Italy

It has become fashionable not to worry about Europe and the euro area. This complacency has a serious flaw: Italy.

Optimists argue that Europe is on the mend. The central bank is maintaining stimulus,Germany’s export potential remains large, and France will continue to be a haven for investors. Struggling countries such as Greece and Portugal represent less than a 10th of the euro area’s economic output and population.

Enter Italy. It is the third-largest economy in the euro area, with a population of more than 60 million and gross domestic product of more than $2 trillion. The government’s debt burden, at about 1.3 times GDP, is among the largest in the world. (That’s the International Monetary Fund’s estimate of gross debt, which is the most reliable series to use for cross-country comparisons; net debt, which includes some government assets, is projected to be 105.8 percent of GDP this year.)

Troubling as Italy’s public finances may be, they are not the main reason to be concerned. There is no magic threshold above which government debt will crush the economy, and countries have grown their way out of even larger debt burdens.”

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Read Simon Johnson’s full Bloomberg Op Ed here

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