With Italy now joining Greece and Spain in unveiling new austerity plans to curb debt, belt tightening - or at least promises to do so - appears to be en vogue among the historically loose spenders of southern Europe. Still, U.S. businesses and credit markets are unlikely to see much of a significant direct impact quickly as a result.
The Italian parliament approved a two-year austerity package this week worth nearly $30 million (USD) to help combat its long-growing budget deficit that, like shortfalls in other "PIIGS" nations Greece and Spain, have frightened investors, creditors and ratings agencies alike in the United States and throughout the world. The Italian plan, sure to draw protest from its entitled public sector employees and unions, includes a three-year freeze on public sector wages, cuts for top level ministers and parliamentarians of up to 10% of annual salaries, delays in retirement age eligibility starting in 2011 and abolition of small provincial governments and publicly funded think-tanks.
And though the recently struggling euro did rally a bit in days following the announcement, experts appear suspicious of Italy's true belt-tightening intentions.
"I think the plan is just to forestall the international speculators," said Chmura Economics & Analytics Senior Economist Xiaobing Shuai. "[Despite a massive budget deficit], their situation was not as severe as Greece or Spain. I think they do not want to become a target."
Shuai as well as Zach Witton, an economist with Moody's Analytics, agree the austerity plan could help in boosting confidence in some semblance of European Union stability. However, that impact will only affect the U.S. economy and credit availability in indirect ways, such as keeping the euro from losing further value.
"The three-year civil service nominal wage freeze along with the across-the-board 10% cut in government departments have the potential to put downward pressure on imports - However, the U.S. is not among the top five sources of merchandise imports to Italy," said Witton. Additionally, the top U.S. exported products, related to the pharmaceutical and aircraft industries, are unlikely to be connected to spending from public sector employees.
Witton added that credit flows coming from Italy are likely to be affected by more than just what's happening domestically, including the new austerity plan. "Italian banks will not start to ease credit conditions until investor concern about the Greek debt crisis spreading to other countries in the region subsides and Italy's economic recovery gains momentum," he noted.
Brian Shappell, NACM staff writer