A high debt-to-GDP ratio is a source of vulnerability: it discourages investment and impedes growth; it exposes countries to a loss of market confidence and financial contagion. Budget flexibility is essential in a cyclical downturn, but further progress, i.e. strong lasting growth of output, is impossible with a large deficit.
Italy cannot delay setting in motion a steady and tangible reduction in the debt-to-GDP ratio. The reduction of the time needed to achieve this requires budgetary discipline above all else. Structural reforms to increase the economy’s growth potential are essential. We should bear in mind, however, that in the absence of adequate safeguards, a country’s recovery efforts can be rapidly thwarted by negative shocks.