(Bloomberg) -- The Italian government could look to Francois Mitterrand's France for a lesson in the perils of raising spending without any improvement in competitiveness. Worse still, the economic sting will be sharper without the ability to devalue, according to Nataxis.
Italy's plans for extra public spending and a more generous pension system, without a corresponding effort to correct companies' deteriorating competitiveness, is a recipe Mitterand tried in the early 1980s, said Patrick Artus, chief economist at the French bank.
For France, that led to a wider budget deficit and rise in interest rates, a series of devaluations of the franc and then a return to austerity.
Locked into the euro, Italy won't be able to devalue, which makes its position even more precarious.
“We should therefore expect an even more pronounced deterioration in the economy, combined with a rise in interest rates, forcing the country to switch to an austerity policy even faster than in France in the early 1980s,” Artus said.
Italy's populists blame austerity of years past for many of the nation's current economic woes. They're sticking to their guns on the planned budget, resisting pressure from investors and the European Commission.
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To contact the reporter on this story: William Horobin in Paris at whorobin@bloomberg.net
To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Kevin Costelloe
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