Economic crisis in Italy

Table des matt©rest l. Introduction Italy is facing strong imbalances on a macroeconomic point of view, and that requires special policy actions in order to restore an economic balance in this country, currently struggling in an economic crisis. The main problems are the huge public debt held and the lack of external competitiveness. Both those problem are originally caused by the extremely slow economic productivity growth of the country.

Given the fact that the Italian economy has a relatively important role in the European economy, it is urgent to put in motion some policies in order to avoid risks of negative effects on Italian such as European economy. Italy, to recover as quickly as possible from that crisis, will have to face some major challenges. To get rid of that major debt they are holding, they will have to sustain very high primary surpluses. They also will have to reinforce their GAP and keep it growing for a long period.

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In terms of fiscal objectives, Italy has made many improvements in 2013 but it might be insufficient given the scale of the public debt ratio. On the following graph, we can follow the evolution of the Italian government debt as percentage of the GAP. Figure 1 (Alhambra Investment Partners 2011). The part that interest us is on the right, from the financial crisis in 2008. We can observe that the debt has been growing tremendously since then but the national GAP did not follow.

Figure 1: General Government Debt Italy, as % of GAP The roots of this crisis are to be found in the lack of competitiveness that Italy has been experiencing over the last years. This lack of competitiveness happened because of wrong alignment of wages and salaries, too high labor taxes and a bad export system, too expensive for a large amount of small companies who therefore could not compete internationally. Italy faces many other problems such as corruption, inefficiencies in the Judicial system and in the administration, tax evasion, etc.

All those issues are other obstacles to Italy’s financial recovery because they Economic crisis in Italy By Augustine 992 II. Macroeconomics from 2007 to now Italy’s growth has been of an average 1. 5% per year but from 1999 to 2007, which is much lower than the rest of Rupee’s countries average of 2%. That was mainly due to the lack of productivity. From to 2007 to 2013, this lack of productivity, enhanced by a slowing in the investment, was greater than most of other European countries. Indeed the GAP was reduced by approximately 9%, while it had a decline of an average of 2% in the rest of Europe (European Commission 2012).

According to the European Commission’s forecast for the years to come, Italy will recover slowly, mainly helped by export, which will create investments. In the next fugue, we will observe the dramatically slow growth of the Italian GAP and the urgent need to put some policies in place in order to restore a decent growth in Italy. Figure 2 (Edward Hugh 2011). Figure 2: Italy GAP – 10 years moving average 1980 – 2010 (annual, %change) As scudded in the introduction, a huge problem is the growth of the debt-to-GAP, despite the financial consolidation introduced in Italy to fight the crisis.

The fiscal adjustments undertaken by the Italian government in order to recover from the crisis has allowed the country to reduce its public deficit significantly from 2009, where that deficit was 6% of the national GAP to 2012, where it was reduced to 2. 5%. AT the same time, many areas of the society were affected by those financial adjustments such as the wages that were frozen in 2011, the strong reduction in hiring or the raise of age of retirement. Overall taxes on households also have much raised, in particular taxes on property.

The financing conditions has also been very much affected by the restriction imposed by the government in response to the economic and financial crisis. The rates of loans have increase and it affected all Italian firms. On the employment level, the economic recession has not affected Italy as much as other European countries but the unemployment rate still doubled from 2007 (6%) to 2013 (12%). The number of hours of work performed per week per employee was greatly reduced and the number of involuntary part-time workers also rose.

The young generation aged between 16 and 24 has been particularly touched with an average 40% unemployment rate in 2013. Italy made all kinds of reforms to augment the growth and thereby respond to the crisis. The most important ones were the ones concerning the taxation on property, actions in civil Justice and the liberation’s of some professions and of the energy sector and of course actions taken in the area of the labor market, such as the pension reform that raised the age of retirement.

It is a good thing Italy tries to recover with those reforms but the problem is the impact n economy is quite slowed by a lazy implementation. That lazy implementation is partly due to a bad coordination between the different levels of the Italian governments. All those policies, implemented in the aim of bringing money in, also lead to the appearance of difficulties for workers and businesses. Ill. Main Risks and Expectations A. Public Debt The public debt is one of the greatest threats to the Italian economy. It amounted to 1,812. 9 billion euros in April, a level which the public debt had never reached before. (Trends-Attendances 2014). This high debt is responsible for the Italian blocked growth. Indeed as the government lacks money, it also cannot finance an adapted amount of physical and human capital. This public debt needs to be fulfilled and therefore forces the government to increase the level of taxation, which becomes another reason for the weight on growth. The high expenditures of Italy also are responsible for its lack of growth.

The debt also makes it impossible for the government to react appropriately to the economic “flow’ of the country. Italy, while in the process of getting adopted by the Euro-area, made a big fiscal consolidation by raising its primary surpluses and that helped reducing the debt-to-GAP ratio. Italy also benefited from very low expenditure interest while entering the Euro-area. Despite all that, the debt-to-GAP ratio only declined very little. From 2011 to 2013, the expenditures interests has been raising as the real GAP has kept on diminishing, which resulted in a raise of the debt-to-GAP ratio again. . Expectations The debt-to GAP ratio is expected to reach its peak this year, at approximately 135% and then slightly decrease in 201 5, thanks to all measures undertaken by Italy since 2011. All those reforms, once they fully will be implemented, are expected to meliorate the financial position in the long-term. Of course the main challenge concerning this debt-to-GAP ratio is to keep it decreasing continuously. The two main ways to achieve that is to manage to have a continuous growth as well as high primary surpluses. B.

Competitiveness 1 Risks Due to the crisis, Italy has lost a lot of competitiveness and that puts their prospects of economic growth in Jeopardy. In the export sector, Italy has been experiencing a very hard loss of market shares. Especially between 2000 and 2010, Italian exports increased by a little 2%, while the rest of Euro-area countries were growing at an average 4% per year. Those 10 years contributed to the great loss of export market shares of Italy. From 2010 to now, the gap between Italy and the rest of Europe narrowed somewhat, as the export growth grew to 2. % for Italy against 3. 3% average for the rest of the Euro-area countries. The range of products Italy is exporting is greatly put in danger by cost competition. The main products they export, such as metals, foodstuffs, ceramic, glass, cement, stones, textiles and other leather products has been knowing a strong competition since the liberation’s of international trade. Due to the diminution of Italy’s imports, the account balance of the country has been adjusted greatly adjusted.

Another thing that contributed to the adjustment of the account balance is the decline in private savings and of investment. Indeed, as households faced a fall in their revenue perspectives, they had to adjust and start to invest and save less, simply in order to survive. On a cost-price competitiveness point of view, Italy also has suffered and that is due to the raise in labor cost, which the unit labor costs have been increasing faster than in the other Euro countries in average while the evolution of wage evolved in line with these other countries.

Reforms of the labor market were taken in order to improve the alignment of wages and productivity by augmenting this productivity. In reality, the adjustment SF employee’s wages has mainly been done through a diminution of hours performed by workers. On the following graph, we can observe the position of Italy concerning their export performances. Figure 2 (Vogel 2014). The important thing to note is that “There is no clear cross-country relationship between variations in relative export prices and variations in export market shares.

In fact, price competitiveness gains are positively correlated with market share losses. This evidence does not imply that relative prices are not relevant for export markets shares, but that non-price determinants have been more important during this period and have more than offset the effects of export prices. ” (Vogel 2014) Figure 3: Change in the world share of exports and in relative exports prices for goods and services, 1999-2011 Another big weight on Italy’s external competitiveness is the cost of doing business.

Indeed the costs of input are very high in several sectors and all kind of inefficiencies such as administration inefficiencies also gets in the way of firms and especially small and medium enterprises. Those factors, added to the high interest banks asks on loans, high costs of electricity generate a really unfriendly environment for Italian businesses. The fact that Italian businesses are not much involved in the overall value chain is also a barrier to the export competitiveness of the country. 3.

Expectations To favor the growth, taxes should be made friendlier to productive factors of society and cost-competitiveness should be improved in the short-term. Indeed in Italy, the Barbour is one of the most taxed ones in Europe, the second most taxed to be more accurate, with more than 40% tax on labor, while the average for the rest of Euro- area countries is a little above 35%. Some measures were taken in the 2014 budget to remedy to this heavy tax on wages. The government should undertake other policies to support labor and accumulation of capital in order to improve cost competitiveness.

The fact that those reform are only helping in the short-term must be kept in mind and larger reforms will be needed to restore actual competitiveness because tax shifting policies only have minor effects. The other effort the Italian government should do is to get the firms of its country to get more involved in the global value chain of the country because that helps those businesses get cheaper and also higher-quality materials and therefore helps them be more effective. It is important to note the 2012 policies made by the Italian government in order to address the labor problem.

These policies were mainly made to help get rid of the rigidities of that labor market. Flexibility of workers was enhanced, dismissals procedures were regulated and the motivation for companies to hire employees for Eng-term periods were augmented. That all worked for more stable Jobs and labor market in general. Nevertheless, benefits of these regulations are hard to evaluate because the crisis is still hitting Italy and making damages, and those damages are Social Policy 2014). Another big step that Italy is trying to take is the decentralized bargaining, which helps aligning wages to productivity and labor conditions.

It is particularly important for a country like Italy, which is known for having a great disparity in labor outcomes and in productivity. Major agreements were taken in 09, 1 and 2012 regarding the decentralized bargaining but there is still much work remaining, as for the moment only the industrial sector is concerned. Policies regarding the rest of the labor areas must be taken in the years to come to aim at a beneficial decentralization and stabilized relations between companies (Ministry of Labor and Social Policy 2014). C.

Productivity Many of the macroeconomic problems Italy has been experiencing are partly due the lazy productivity of the country. The TFTP (Total Factor Productivity) has been diminishing since the nineties and that has been a great barrier to Italy’s imitativeness. The stagnation of the Italian’s productivity is another reason for the huge debt the country is holding because it blocks the growth of the GAP. The next fugue shows the evolution of the production per worker in Italy since 1990 and the decline is clearly observable. Figure 4 (COED 2012).

Figure 4: Italy Output per Worker 1990 – 2011 This low productivity takes roots in a completely inefficient allocation of financial capital, human capital and tremendous weakness of the public administration and the governance. That weakness in governance and administration is getting in the ay of a proper allocation of resources by the Italian government in the way of productive sectors. The fact that the government is reallocating resources wrong is proven because there is no relation between the growth of the loan made to firms and their productivity.

That shows that the government is no granting the money to the productive sectors of the economy (Hosannas et al 2013). IV. Conclusion To conclude, a recapitulate of Italy’s main reasons why the Italian economy is declining since twenty years. First, the enormous public debt is putting a barrier to the health of the Italian economy. Second, the decline in the labor productivity is a main reason for the decline of the Italian GAP. This low labor productivity has many reasons such as bad management, absence of economic incentives and poor education. Third, the very lowering competitiveness of Italy.

The main evidence of this lack of competitiveness is the loss of market shares in the export sector. The product mix that Italy used to be successful with in export, called low technology goods, is overtaken by China and Asia. They are overtaken by those countries because they cannot compete with the very low wages. Fourth, the austerity methods seed by Italy to respond to huge national debt also did not help to recover from the economic crisis and was a factor of the very slow growth of the national GAP. Fifth, the entering of Italy in the Euro countries has been a failure.

As Italy was one of the most pro-Euro countries in Europe at the time, the effects of this attachment to the Euro actually created more problems for Italy. Indeed Italian bonds went up, liquidity reasons for the economic decline of Italy. The following reasons are not purely economic, monetary reasons but it is important to acknowledge these reasons as roots of the current state of the Italian economy. The lack of dynamism, which causes a very difficult environment for the youth. Indeed as we take the example of the government, all the important positions are held by very old people, letting very few space for the youth and for fresh ideas.

The very high level of corruption, closely linked to the great presence of the mafia. Because of that, there are many misappropriations of public funds and that also is a barrier to the well-being of the Italian economy in the long term. The demographic changes, with an Italian birth rate amongst the lowest in the world, are putting pressure on the government for future finances. The separatist tendencies between the northern and southern parts of Italy are other factor for the decline of Italy. The principal aim of Italy today is to restore a durable growth in order to fix the macroeconomic problems of the country.

The two principal issues to address, cited in the previous section, are the high public debt and the loss of competitiveness. To address those issues in the long term, the focus should be put on an increase of productivity but the measures taken to do that can take a long time to be implemented. The following solutions could have a positive impact while possible to implement more rapidly. Concerning the public debt, Italy must keep high primary surpluses id they want to reduce the debt-to-GAP ratio somehow. Recently, Italy seems to have some of the investor’s confidence back thanks to some fiscal adjustments.

Now the Italian government has to put in place a balanced budget and keep the current highness of primary surpluses to have the debt-to-GAP declining continuously for the years to come. Concerning the cost- competitiveness, Italy has to put in place some policies in order to reduce the cost of labor and diminish the taxes imposed on labor to restore external competitiveness. The benefits of the measures taken by the country concerning the productivity will arise in the long-term but some measures could be taken to restore the cost-competitiveness in the short-run.

The collective bargaining system could be improved to align the wages to productivity more accurately and the labor conditions could be investigated. The shift of taxes to get those away from productive factors of society and diminishing the Italian high tax wedge on labor could help diminishing the labor overall costs and therefore enhance competitiveness and favors growth. As last, if the administrative procedures are simplified, the price of inning or starting a business could fall, also fostering external competitiveness.

All these reforms must be taken rapidly and implemented efficiently. A structural reform momentum must be put in place with a precise agenda of what to do when, with clear priorities. Priority must be put on the removing of the barriers to the proper allocation of resources to favor competition and growth and make the administration and Judicial system more effective. A proper allocation of resources into the economy would also help for new firms to appear and thus raise the amount of exports. Investments should also be taken in consideration.

If Italy wants to increase its productivity, the investments must not only augment in quantity but more importantly in quality. Italy will therefore have to encourage the development of capital markets. Overall encouragement of innovation, modernizing of governance V. Bibliography http://trends. Levee. Be/economic/actuality/polities-economies/la-edited-applique- Italianize-bat-des-records/article-1194754562203. HTML HTTPS:// fbkfinanzwirtschaft. Wordless. Com/2011106/30/can-Italy-grow-its-way-out-of-debt/ http://www. Evoke. Org/article/export-shares-price-competitiveness-and-Spanish- paradox