Italy’s government normally spends about 50% of GDP, even more than Sweden, making it one of the most lavish welfare states in the world.  So what does Italy get for all of that spending?  Here’s the NYT:

The underlying logic of Italy’s welfare system, which offers little support for those without tax contributions, remains intact. So Mr. Esposito and his family are relying on weekly food parcels from a community center. “Without their help,” he said, “we just wouldn’t have anything to eat.”

Even workers who are in the system can fall through the cracks. Lucia Vitale works at the Naples airport for about half the year, catering to the hundreds of thousands of tourists who arrive from March onward. For the other half of the year, she and seasonal workers like her can claim unemployment benefits. But those benefits have now run out. And they can’t get help from the government because, Ms. Vitale said, “we don’t fit into the right categories.”

The government has granted a one-time payment of 600 euros, around $650, to the self-employed and to seasonal workers in the tourist sector. But Ms. Vitale technically works in the transport sector, so she can’t apply for the support. For now, she too is getting by with handouts from volunteer organizations.

The situation for many is bleak. “Everyone here is having problems now,” Mr. Gallinari, the florist, said. “There are lots of people who are going hungry. You can see that their behavior is beginning to change.” Reports of social unrest across the region — shopkeepers forced to give away food, even some thefts — have ruffled a usually close-knit community. “The other night I caught some kids trying to break into my garage,” Mr. Gallinari said. “This is new for us.”

Even so, such incidents are rare. More striking — and representative of neighborhood life in Naples — has been a groundswell of community initiatives, to fill the void of absent state support. Some have set up a mutual aid help line so that volunteers can deliver food and assistance. And certain shops have begun encouraging customers to cover a shopping bill for someone unable to pay, in the Neapolitan tradition of the “caffè sospeso,” or suspended coffee.

Notice that even a welfare state like Italy is unable to provide a basic safety net in an emergency.  Why is that?  Why not increase spending to 60% or 70% of GDP for a couple of years, until the emergency is over?

Italy could have done exactly that if they had not run up unsustainable budget deficits when they were not facing a crisis situation.  In fact, they did the opposite, borrowing so much that investors now view Italian bonds as having a greater default risk than German government bonds, despite both being priced in euros.  Because Italy did not save for a rainy day, they now lack the ability to provide emergency relief in a crisis.  Fortunately, Italy has volunteer groups to help out.

In recent years, pundits have often claimed that budget deficits don’t matter, as interest rates on government debt have fallen close to zero (or even negative in many European countries.)  I’ve been arguing that it is risky to boost the debt to GDP ratio to a very high level, at a time when most other pundits thought my ideas were old fashioned and out of date.  I argued that although interest rates are currently quite low, if they rose to high levels in the future then the interest burden on a large public debt could become unsustainable. That seems far-fetched today, but then the 15% interest rates of 1981 seemed equally far-fetched in the 1950s.

This is one reason why it’s not wise for countries to “max all of their credit cards”—borrow as much as lenders are willing to lend. History provides many examples of economic conditions changing in quite unexpected ways.  The “black swan” event in this case turned out to be a global pandemic, not higher interest rates.  But that’s the point—black swans are hard to predict.

Countries with their own currency (such as the US and Japan) have a greater ability to borrow money than those that lack their own currency (such as Italy and Greece.) But having your own currency doesn’t entirely eliminate the long run budget constraint. Rather the “default” that is most likely would involve high inflation, not outright refusal to pay the nominal obligation of the debt.

PS.   Switzerland has also been hit very hard by the coronavirus epidemic, but I don’t see press reports of hungry people in Switzerland.  Their government spends about 34% of GDP, one of the lowest ratios in Europe.