Is the Italian Government Debt Sustainable? Scenarios after the Covid-19 Shock

The sustainability of the Italian government debt has been under close scrutiny since the launch of the Euro Area, and even more so after the Global Financial Crisis. The Covid-19 crisis in 2020 has depressed the Italian economy further and negatively affected the government budget. Despite the rebound in 2021, the state of the economy and government debt in Italy remain precarious. Building on Pasinetti’s work, this paper examines the sustainability of the Italian government debt through a medium-scale, stock-flow consistent, structural macroeconometric model. The model has been coded and calibrated using the R package Bimets developed by the Bank of Italy. Our findings show that the Italian government debt is unlikely to enter a sustainable trajectory in the next few years. While the Next Generation EU and the other fiscal and monetary measures are helping the Italian economy to recover, in the coming years, a greater effort on the part of the European authorities—including an intervention of the ECB in controlling the yield curve—seems necessary to stabilize the debt to GDP ratio in Italy.