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1 1 (September 2016)

handle is hein.amenin/aeiaagw0001 and id is 1 raw text is: Key Points * Global markets and economic policymakers seem to be turning a blind eye to the fact that Italy's stagnant economy could pose a large spillover threat to the global economy. * Italy's banking system suffers from a staggering share of nonperforming loans that raise the risk of an Italian banking crisis, while very low economic growth and high public- debt levels raise questions about debt sustainability. * Given the size of its economy and the possibility of an Italian exit from the euro, financial contagion risks from Italy to the rest of the European economy are simply too big to ignore. In recent months, Italy's highly troubled banking sector has attracted increased attention. Yet both global markets and policymakers remain highly sanguine about the country's economic prospects, seemingly believing that the Italian banking sector's problems can be resolved readily without adverse spillovers to the rest of the global economy. This is surprising considering the very troubled context in which Italy's serious banking- sector problems are occurring. Aside from experiencing virtually no economic growth since it adopted the euro in 1999,' the country has among the highest public-debt burdens in the eurozone,2 and its politics are now showing every sign of fragmenting. Global markets and policymakers also seem to be turning a blind eye to the fact that Italy could pose a threat to the global economy. Italy is the world's third-largest sovereign bond market,3 and it has a very large banking sector.4 As such, Italy may be too big for its European partners to save in the event of an investor loss of confidence in the country. It would seem inconceivable that a full-blown Italian banking-sector crisis, coupled with an Italian public-debt event, would not trigger contagion to the rest of the European periphery and significantly affect the global economy. A Lost Economic Decade At the heart of Italy's financial and political problems is its highly sclerotic economy, which has shown practically no growth since the country joined the euro in 1999. As shown in Figure i, since the Great Recession in zoo8-og, Italy experienced a triple-dip recession that has left its economy some 7 percent below its pre-zoo8 crisis peak. This has prompted the International Monetary Fund (IMF) to forecast that Italy will only regain its 2oo8 peak level of output by 2o25.5 As would be expected from such a dismal economic growth record, Italy's labor market AMERICAN ENTERPRISE INSTITUTE 1

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