Italy’s families are not rich enough to avoid a crisis

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Italian family wealth – illiquid assets, mostly property and financial instruments, held by the country’s households at all levels – has long been a pillar of economic strength in the heavily indebted nation. It is back in focus as the war in Ukraine, energy price shocks and inflation weaken the country’s prospects. At €10 trillion ($10.55 trillion), that wealth is one of the largest stores in the world: 8.7 times the country’s disposable income (which would be mostly cash), according to the Bank of Italy. Faced with Italy’s national debt of more than 150% of gross domestic product, Italian families run veritable gold mines. Additionally, despite the pandemic, household net worth is about 5% higher than it was a decade ago, according to the central bank.

That’s reassuring in a volatile time. But don’t expect prosperity to be a panacea for structural weaknesses. Two decades of stagnation have meant that Italy’s strengths are not as strong as they used to be.

At the moment, the country’s borrowing costs are rising. Market pressures on the country’s government bonds widened the spread between Italy’s 10-year BTP and the German bund to levels that risked becoming unsustainable; This prompted the European Central Bank to call an emergency meeting to promise the creation of a tool to close yield gaps.

To allay financial fears, politicians from right to left in Italy are proposing that family wealth per se negates the risk of national debt. That is not completely right. However, there could be opportunities to reinvest some of that capital back into the economy.

Some sort of wealth tax is the most obvious method, in part because much of the generosity is a result of the country’s high rate of tax evasion. “What Italians saved in unpaid taxes went into buying houses,” says Luigi Guiso, professor of household finance and insurance at the Einaudi Institute of Economics and Finance. A tax of, for example, 1% on home values ​​and bank deposits can be a remedy when the state urgently needs more money. And the current government is ideally placed to begin the baby steps towards a wealth tax: it is led by a technocratic economist – Mario Draghi – who is not seeking re-election.

But there are obstacles. For one, it is difficult to price assets in order to tax them. According to Bank of Italy data, Italian wealth is fairly evenly split between financial instruments – including Italian government bonds and US Treasuries – and real estate. But real estate in Italy, often family-owned for generations, is notoriously difficult to value. Even Draghi is fighting within his coalition government with resistance to a land register reform that would have made it easier to value Italian real estate.

Politicians know that legislating a clear valuation of Italian assets is only a small step from introducing a wealth tax – and polls show (surprise!) that voters universally hate the idea.

And there are political consequences. If the government pushes through a levy, it could bolster support for the far-right Brothers of Italy party, led by Giorgia Meloni, which is the only major party opposed to Draghi’s coalition. A wealth tax could also erode the middle class, the mainstay of mainstream politicians. That’s because the wealthiest individuals have already shifted their wealth abroad, as evidenced by the popularity of Luxembourg or Monaco as domiciles for Italian family businesses.

Italian wealth is also illusory. Yes, it’s higher than it was a decade ago, but it’s actually a downtrend if you look at it over the past 15+ years, a period when Italy’s economic growth has stagnated and productivity has shrunk. Unless Italians start saving again, it won’t continue to grow. In fact, the long-term data trend points to continued impoverishment of households. Italians will not be able to maintain their standard of living without liquidating more and more of their wealth, says Alberto Albertini, vice president of private bank Ersel.

Aside from inflation and rising energy costs, there are other pressures. Corrado Passera, a veteran Italian banker who runs a fintech called Illimity that buys distressed debt, notes that since they were first originated, there have been €280 billion in loans that have grown in credit risk. It’s fair to assume that the majority of this debt was taken on by small and medium-sized family businesses – the backbone of the economy. The widening of spreads threatens to make these loans more expensive to refinance. Of course, not all of these borrowers will default on their debts. But some will.

It’s all good for Passera’s business. But for most others – including Draghi and Italian families – it is another looming crisis: a “loop of destiny” in which sovereign debt volatility spreads and erodes the banking sector through its loan books.

Italy’s chronic failure to curb tax evasion, boost growth and productivity, and reduce its debt over decades has brought it to this crossroads. A wealth tax could have helped, but that time is over. The economic crisis is now too big a problem for Italian families. We have to hope they don’t veer too far to the right to find a solution.

More from this author and others at Bloomberg Opinion:

The woman who could lead Italy to the right: Rachel Sanderson

Italy’s romance with the meritocracy was always new: Adrian Wooldridge

If someone else can lead Europe after Merkel, then Super Mario: Andreas Kluth

This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.

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