The fiscal balance dilemma of Italy: investigating economic stability and growth being put in jeopardy

In the course of the economic crisis a number of austerity measures have been implemented in Italy in order to comply with requirements under the Stability and Growth Pact (SGP) and Fiscal Compact. These austerity measures are in line with the currently dominating perception in EU politics that fiscal consolidation is decisive in order to restore confidence in the markets and to help affected countries overcome the economic crisis. It was taken a close look at the costs and benefits of austerity measures in Italy and investigates their impact on the Italian economy. Using quantitative data from Eurostat it is also analysed whether a balanced budget and low levels of government debt are the keys to long-term economic stability and growth. The analysis finds that this perception is biased and neglects factors like foreign debt and current account deficits. Since the austerity measures had to be implemented in order to comply with SGP and Fiscal Compact, these two legal fiscal agreements have been described to. Moreover, it was examined whether the implemented austerity measures are effective and the least harmful way to stimulate economic growth in the long run. One the one hand, this paper shows that SGP and Fiscal Compact are vital tools to the survival of the eurozone. However, it has also emphasised that timing and severity of austerity measures is not based on a rational decision making process and that current austerity measures in Italy are therefore likely to impede economic growth rather than boosting it.