Daily Management Review

Why Italy's Economy Would Tire Itself Out Without Urgent Reforms


02/08/2016


Loss of Greece or Portugal can be regarded as a failure, yet Italy's loss will look like carelessness. It is hard to imagine that the single European currency could survive in case of conflict with Italy, the third largest economy in the currency’s club (and the eighth in the world).



Francesco Pierantoni
Francesco Pierantoni
Perhaps this explains Italian Prime Minister Matteo Renzi’s recent criticisms towards fiscal rules in Europe. In a January article in the Guardian newspaper, he sounds more like a Greek, complaining about the "EU’s predilection for austerity policies, which prevents the real growth."

For almost a year, Italian Finance Minister Pier Carlo Padoan has been trying to coax the European Commission to settle the "bad" debt problem, which amounts to 350 billion ($ 382 billion), and interferes with the Italian banking system’s normal activity. Renzi calls on European officials to be more flexible, while he tries to get the long-stalling national economy going.

Italy’s life within the euro area has been very unsuccessful. The country has been in recession five of the last eight years. Real (inflation-adjusted) GDP per capita today is lower than in 1999. The sovereign debt exceeds 130% of GDP. The Italian economy’s competitiveness is even worse. Since 1998, the productivity has been steadily declining, while labor costs - increasing.

Ever since Italy joined the euro zone, exports ceased to be the engine of growth, which in this connection has been steadily declining. However, slowdown is not something that a country with a huge debt can afford, says the British magazine The Economist.

Renzi headed the cabinet at the appropriate time (early 2014). Tight fiscal and monetary policy, which became one of the reasons for the euro area’s poor performance in the aftermath of the financial crisis, was not already causing damage. Shortly thereafter, the ECB started the quantitative easing program to stimulate domestic demand, which positively affected the Italian interest rates.

However, the problem of low competitiveness has not disappeared. There are many reasons for the productivity collapse in Italy. Due to punitive regulation of the labor and commodity markets, the country became one of the most expensive places in the rich world to start a new business. Taxes and bureaucracy do not encourage successful companies grow and become bigger. Almost 70% of Italian workers are employed in companies with a staff of less than 50 people (compared with 30% in America).

Even more alarming is that the percentage of young Italian workers with a university degree does not exceed 10% - one of the lowest rates in the rich world. At the same time, more and more educated young Italians are leaving their homeland in search of a better life in other Western countries.

Renzi wants to change the situation. Many have compared his ambitious economic reform plan to those made by Hartz in Germany in 2003-2005 (a socio-economic system’s reform developed by the government commission headed by Peter Hartz).

source: economist.com






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