I’ve repeatedly written about the likelihood of another European fiscal crisis (see here, here, here, and here), and I’ve specifically speculated that Italy will be the first domino (see here, here, here, here, here, and here).

Given the rapid deterioration of fiscal policy in nations such as France and the United Kingdom, I’m no longer sure Italy will be the first.

But when the you-know-what hits the fan, Italy will be one of the dominoes. I feel confident in that prediction because Italy keeps digging its fiscal hole deeper year after year after year.

Here’s the IMF data showing how spending has risen faster than inflation, both recently and for the entire 21st century.

The good news, at least compared to some countries, is that Italy isn’t going downhill at a rapid rate.

• Spending is growing only about one percent faster than inflation.
• The aggregate fiscal burden, measured by how much of the economy’s output is diverted by government, is expanding at a relatively modest rate.

This is another example of the 20th Theorem of Government.

But there’s another way of looking at Italy’s fiscal policy. An appropriate analogy is that Italy is a patient with heart disease who is smoking a pack of cigarettes each day.

That’s much better than smoking two packs or three packs per day (which is China’s recent trajectory), but nonetheless a very unwise decision.

To make matters worse, Italy occasionally compounds its poor economic health with the fiscal equivalent of binge drinking. I wrote last year about one very expensive boondoggle. The Wall Street Journal editorialized yesterday about the potential for another bender.

Here are some excerpts.

Prime Minister Giorgia Meloni is facing pressure to delay or block future increases in Italy’s retirement age, currently 67. She said this week that her administration isn’t actively considering ditching the existing system that increases the age periodically in line with life expectancy, but labor unions and a party in her coalition government are agitating for it. Instituting the gradual increase in retirement age (by a few months every couple years) was one of the most important reforms Rome implemented after the 2010 eurozone debt crisis. …Rome can’t balance its books as it is, and the fiscal crisis would have been much worse without the pension reform. Yet precisely because the country avoided an outright crisis, the political sense of urgency surrounding reform appears to be diminishing. …Kudos to Ms. Meloni for saying she’ll hold her nerve. Meanwhile, the overarching lesson from Europe is that these entitlement reforms become harder the longer you wait. That’s a warning to Washington.

Just in case you’re wondering whether the Italian government should be spending more, here’s a tweet that captures the country’s horrific demographic profile.

This is an upside-down population pyramid!

I’m not the only one wondering about an Italian fiscal crisis.

Here are excerpts from an article written last year by Desmond Lachman of the American Enterprise Institute.

As late as the second half of 2009, markets were falling over themselves to buy Greek government bonds. They did so at low interest rates even at a time when that country’s economic fundamentals were highly worrisome. Today, markets appear to be falling over themselves to buy Italian government bonds at low interest rates. They are doing so even though that country’s sovereign debt is on an unsustainable path and its economy remains as sclerotic as ever. …markets turned a blind eye to the unsustainable path on which the Greek economy found itself. …Fast forward to today, Italy finds itself on an unsustainable public debt path. At around 140 percent of GDP, not only is Italy’s public debt to GDP ratio higher than was that of Greece on the eve of its crisis. …or how long investors will be prepared to roll over the large amounts of maturing Italian government debt. …The late MIT’s Rudi Dornbusch used to say that economic crises take a lot longer to occur than you would have thought possible. However, when they do occur, they occur more quickly than you would have expected. …We have to hope that European policy makers…have a plan ready for the next Italian sovereign debt crisis.

Regarding the final sentence in the excerpt, I hope the plan is to do nothing.

Though I’m sure the bureaucrats at the IMF and European Commission will want to put together a bailout.

But it’s a bad idea to provide bailouts to national governments, just like it’s a bad idea to provide bailouts to state governments. Or banks. Or student loan recipients.

P.S. Some have proposed a flat tax for Italy. Given Italy’s punitive tax system, that obviously would be a good idea. But it’s impossible to have a good tax system without good spending policy.

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Image credit: Chris Ford | CC BY-NC 2.0.