The Impact of Austerity Measures and its Legacy on the Italian Economy: An Analysis of Global Financial Crisis and Sovereign Debt Crisis

This thesis aims to analyze the impact of austerity measures taken by Italy to battle the Double Dip Recession it had seen over the years of 2008-2011 and its legacy on the output growth and debt:GDP ratio of today. The contractionary fiscal policies adopted as a response to the Global Financial Crisis and the Sovereign Debt Crisis were focused on balancing the budget and on sustaining the huge accumulated debt, respectively, but hardly on fostering the stagnant economic growth for which the country was battling in the previous decade. The high unemployment rate which the Italian economy was characterized by didn’t welcome the austerity measures and the private investment further crowded out. The governments over this period had a hard time reassuring international markets on the soundness of Italian public finances, a series of structural reforms were implemented together with the austerity measures to address the problems both in the short and the long run. For all that, the trade-off between economic growth and public debt sustainability is a highly disputed matter for policymakers and so is the assumption that austerity measures are the main underlying reason for persisting sluggish growth of the Italian Economy.