Date: 6 September, 2018

Executive summary

During the 1970s and 1980s, Belgium and Italy accumulated huge amounts of public debt. In the early 1990s, at the time of the Maastricht Treaty, public debt reached a peak of nearly 140 percent of GDP in Belgium and nearly 130 percent in Italy. After Maastricht, both countries made major fiscal efforts in order to qualify for membership of the euro.

When the euro was launched in 1999, public debt had been brought down substantially in the two countries, to roughly 110 percent of GDP. At the time Belgium and Italy were also identical in another respect: GDP per capita.

Today the situation is very different. The level of public debt is 130 percent of GDP in Italy against only 100 percent in Belgium. Worse, in GDP per capita terms, Italy is now 20 percent poorer than Belgium. No wonder Italians are dissatisfied with their lot.

This Policy Contribution looks at the evolution of public debt in Belgium and Italy since 1990 and seeks to explain the contrasting evolution in the two countries in the run-up to the introduction of the euro, during the early years of the euro and since the beginning of the crisis.

It finds that, after substantial fiscal efforts during a relatively brief period before the launch of the euro, Italy’s efforts tailed off, while Belgium continued to consolidate its debt at an impressive pace. Italy also did too little to improve its growth performance, which lagged significantly behind Belgium’s and that of all other euro-area countries.

When the crisis hit the two countries, Italy was therefore much more vulnerable to market sentiment than Belgium, especially when the sovereign debt crisis spread from Greece to other euro-area countries. Italy responded to the onslaught of markets with austerity measures, which made matters worse, sending GDP growth into negative territory and increasing the debt-to-GDP ratio.

Politics has been central to the contrasting debt dynamics in the two countries. Bad domestic politics prior to Maastricht were responsible for the huge accumulation of public debt in Belgium and Italy up to the early 1990s. Maastricht brought fiscal discipline to both countries, but the constraint proved more binding on Belgium than on Italy once the two countries joined the euro. During the crisis, Belgium fared better than Italy because its political class displayed an absolute commitment to debt sustainability and to euro membership that was at times lacking in Italy.