Reuters has a very interesting interactive tool where you can play around with different Italian debt scenarios. Here, for example, I cooked one up where a 7.5 percent interest rate on the debt and a 3.7 percent primary budget surplus are totally fine:
All you need to get there is a 4.5 percent Nominal Gross Domestic Product growth. What’s super-nice about this is that it the 7.5 percent interest rate is really on the high side. If markets were confident that Italy would enjoy 4.5 percent NGDP growth, there’s no reason to think they’d demand such a high interest rate. If rates fell to 6 percent, then 4.5 percent NGDP growth would be manageable even if the primary surplus fell to as little as 1.8 percent of GDP. But if Italy only gets a 2 percent NGDP growth rate, then even a 6 percent interest rate is only payable with a primary surplus of almost 5 percent of GDP.
This is a long-winded way of saying that while there’s more to Italy’s budget situation than the ECB’s tight money policies, the ECB’s tight money policies are also very relevant. It’s extremely strange for a country forecast to run a primary surplus to be facing a sovereign debt crisis.