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Introduction

Italy is one of the world’s largest economies, attested by the fact that it is a member of G7 group of countries. Its economy is mostly industrialized and is largely categorized into two: a highly developed industrial northern Italy with a high concentration of private companies and southern part that is less developed. This part is characterized by welfare dependency and a high unemployment rate. The manufacturing industry provides the country with a reliable source of income. The country is known for producing quality consumer goods, with most of the companies being private. Activities such as agriculture, construction and welfare sectors provide more than a sixth of the country’s GDP.

However, in recent years the country has been going through financial difficulties; a situation that was worsened by the 2008 financial global crisis. Italy has a huge public debt, around 120 % of the total GDP. The country has lately been implementing structural reforms to reverse this downturn like tackling corruption, reducing government spending as well as creating job opportunities for the youth (CIA World Factbook). This paper will analyze the current economic situation in Italy, the key indicators of economy and gives recommendations on the measures that should be taken to get the country back on track. These indicators will be supported by graphs in the appendix section.

GDP Annual Growth Rate

Italy’s GDP annual growth rate was growing steadily at 1.44 % from the year 1982 up to the year 2000. However, the growth has been fluctuating greatly in those years. For example, in the year 2007, Italy’s GDP growth rate was around 2 %. It nosedived the following year after the financial crisis; a decrease that reached a historical low of -6.70 % in March 2009. The rate then picked up in 2010 to around -3 %. In this year, Italy’s annual GDP growth rate rose by 0.88 % (Trading Economics). See graph number 1

Balance of Trade

Italy mainly manufactures consumer products. Its major export goods are foodstuffs, motor vehicles, electrical appliances, clothing and precision machines. The country imports a wide range of products; energy, beverages, tobacco, textiles engineering products. Other imports are clothing, motor vehicles, electronic appliances and foodstuffs. The country mainly trades with other European Union countries, especially Germany and France. In this year (2011), the country recorded a trade deficit of about 1.840 billion Euros. This is an increase as compared to the same period last year, where the balance of trade was about 3.5 billion Euros. In 2009, the figure was about 1billion Euros (The figures given here are taken from July estimates of each year). From this trend, it can be concluded that the country will continue to experience trade deficits in the short term. Analyzing the monthly balance of trade deficits, it can be seen that Italy has been recording a trading surplus only in August for the past three years. In the rest of the months, a trade deficit is recorded. See graph 2 in the appendix. (Trading Economics)

Industrial Production

The industrial production evaluates the varying output of the industries. As the paper had already discussed, Italy’s economy depends mainly on industrial production such as manufacturing, mining and other utilities. On average, the country’s industrial production has been contracting over the years (an average of about -0.07 %). Italy’s industrial production was highest in 1994 at 17.70 %. However, the financial crisis of 2008 hurt Italian industries so much that industrial production was at a very low -25.6 % in April, 2009. After that, industrial production increased and even reached a high of almost 10 % in mid 2010. This growth could not be maintained and by mid this year the industrial production had shrunk to 1.9 %. See graph 3 in the appendix. (Trading Economics)

Inflation Rate

Italy’s average inflation rate over the years has been around 20.5 %. At the peak of the global financial crisis, Italians had to face a historic inflation rate of over 4 %. However, by mid 2010 the inflation rate had been managed to almost 0.00 %. The rate started to rise again and by November 2011 it was reported to be 3.3 %. (The fluctuations can be viewed in graph 4 of the appendix).

Unemployment Rate

The rate of unemployment in Italy as of October 2011 was 8.5 % against a total population of 60.6 million people. This was a slight increase from the figure of 8% that was recorded in July this year. This figure has been fluctuating in the recent years although it has remained since early 2009 where it was about 7 %. Within these years, unemployment rate reached a high of 8.6 % in mid 2010 but it has not gone down below the 8 %. This suggests that this rate will remain above the 8 % threshold in the short term (Trading Economics). (See graph 5 below).

Exports

Italy exports mainly foodstuffs and clothing, precision machinery, electrical appliances and motor vehicles. During this fiscal year, the country recorded total export revenues of 33 billion Euros. In the same period last year, the country’s exports were worth 30 billion Euros which was more than the 27 billion Euros earned in 2009. This trend suggests that the country will earn more export revenues in the short term (Trading Economics). Graph 6 in the appendix shows Italy’s recent export revenues.

Government Budget

The government of Italy experienced a budget deficit of 4.8 % in 2011. This was an improvement to the more than 5 % that it had in 2010. For the most part, the government has always been experiencing a budget deficit in the past years. The lowest budget deficit was recorded in 2001 where it was less than 1 % but could not be maintained or lowered even further (Trading Economics). However, the government plans to reduce this deficit and break this sequence in 2013 where it should record a budget surplus. The budget deficit can be viewed in the appendix, graph 7.

Government Debt as a Percentage of GDP

This is sometimes referred to as debt to GDP ratio and is defined as the value of national debt a given country has expressed as a percentage of its GDP. Well, the government of Italy has a debt of about 119 % of the country’s total GDP. Over the years, the country’s national debt has been very high at an average of about 108.6 %. The lowest GDP the country has ever recorded was way back in 1988 where it was 90.5 %. Italy government public debt was at a record high in 1994 at 121.8 % (Trading Economics). With a debt of almost 120 %, Italy is going through an economic crisis at the moment as it faces high interest repayment rates with a real possibility of defaulting unless urgent measures are taken (See graph eight of the appendix).

Italy is going through a precarious economic situation at the moment. This has been blamed on the country’s public debt which has been among the highest in the world. Countries that had a similar problem have already been bailed out by the European Union: Greece, Portugal and Ireland. Such a bailout cannot be applied to Italy due to its economic might (it is the third largest in Europe) with many economists believing that Italy is too big to be bailed out (The Economist, 2011). At about 1843 billion Euros, the government public debt is the fourth largest in the world (Economics Panorama, 2011). This debt has negatively affected the country’s economic growth and has led to the resignation of Silvio Berlusconi and the appointment of Mario Monti, an economist. This was a desperate act to save the country from further economic downturn. The next section will analyze Italy’s current debt situation, the policies the government is undertaking to tackle it and gives recommendations of how it can be reduced in the long term.

Italy’s Public Debt in Context

For the past two decades, Italy has averaged a debt to GDP ratio of more than 100 %. This simply means that the country has always flirted with these high values over the years but somehow managed to experience a total economic meltdown. This can be attributed in part to a steady economic growth that in effect offset the debt over the years. However, the economic down turn ever since the 2008 global financial crisis has slowed down the country’s economic growth. Italy may be the third largest in the European Union but its short term economic prospects are not good. It is expected that the economy will contract in 2012 and flatten the in 2013. Additionally, the costs of servicing the debts are rising and take a large portion of the country’s budget (Donadio, 2011). This simply means that the country cannot incur further debts. In fact, it has to reduce its borrowing before the situation escalates to unmanageable levels.

The last time the country experienced a similar situation was in 1999 when it officially joined the Euro zone. This action reduced the borrowing rates hence encouraged borrowing. On a good note though, the government used the borrowed money to promote development projects in the Southern parts of the country that were lagging behind the North. The economic climate at the moment is different from that at the time. This is because the interest rates are high and still rising. Paying off is costly and must be done urgently or else the country risks going bankrupt. Italy cannot afford a high public debt at the moment (Hirsch, 2011).

In mid this year, banks in America held about $ 50 billion worth of Italian bonds. On the other hand, their European counterparts held around $ 800 billion. However, many investors fear that Italy’s economic situation may not bring forth any profits on the bonds (Moon, 2011).

The new Prime Minister, Mario Monti, has proposed new austerity measures to get the country back on track. His policies are mainly focused on increasing revenues while at the same time reducing expenditure. Italy has always experienced tax evasion by its citizens. For instance, in only half of 2009, the Italians evaded taxes totaling to around 5.10 billion Euros. Therefore, he has proposed to ban all cash transactions of more than 1000 Euros. This, he hopes, will make tax evasion difficult. This is because many businesses will demand cash payment which would not be reflected in the accounting books. This rule will ensure that some part of the more than 10 billion Euros that are lost are recovered by the government. This will increase government revenues hence reducing its dependency on debt.

Other measures put forward are the raising of the country’s value added tax (VAT) to 23 %. This is simply an act of increasing revenues. The government has proposed to give out incentives to companies and enterprises to encourage them employ more workers. Women will now officially retire at the age of 62 while the men will retire at 66 from the current 60 and 65 respectively. There will be incentives to encourage the workers to stay on their jobs until they reach 70. With time, the retirement age of women will be raised to match the men’s. Lastly, the award of pensions would be evaluated based on how long a worker contributed rather than his/her salary at the retirement time (Donadio, 2011).

Recommendations

The main problem that Italy is facing is not the high public debts; it lies in the cost of servicing them. This is because many investors are looking at the country’s economic situation with fear. As a result, they are tending to demand more and more returns on the investments they have made in the country. Many of them are now going for bonds in the secondary market which are priced at a slightly deeper discount. This in effect has led to the increase in price of the new bonds that the country sells to investors. Therefore, Italy has to stop the decline of the value of bonds in the secondary market. The country has to deal with this by assuring the investors that the situation is under control to raise their confidence. The investors should also be assured that the costs will be reduced. The country has to find alternative avenues of generating revenues so that it does not rely too much on the bonds. This will stabilize the price of bonds and hence the costs of servicing the debt.

The appointment of an economist as prime minister was a step forward in the fight against rising costs of debts. However, Monti needs to prevent a further bond slide. This is because if the investors are convinced that they will gain profits from the bonds, they will not clamor for deep discounts and hence the price of the bonds will not fall in the secondary market. Therefore, the country will not be obliged to pay more to issue new bonds. This relief will enable it improve other sectors of the economy as well as reduce its expenditure (Hirsch, 2011).

Italy, as a country, needs a stable political climate. For the past decade, Italy has had five prime ministers with most of them serving for approximately one year (Adultlearn). This simply means that most of the prime ministers have not put forward measures and see the measures come to pass. From the year 1993, the country’s political parties have been rotating prime ministers. While this is important, it hurts economic growth because when a new leader comes in; he brings about new policies, almost discarding his predecessor’s. This is because different parties have mostly opposing ideologies. However, there is a high possibility that one’s policies will not come to pass due to the high turnover rate of the political leaders. Thus, the country has to elect an able leader and give him/her the time and freedom to make policies and see them to completion. This is the case in many developed countries that have ably dealt with financial crises. Having a clear leader and government for a specified time is crucial as both can push through reforms and utilize the room it has been given to ensure that they are met. If Italy adopts such a leadership, it will facilitate the tackling of public debt.

The government has to come up with clear but comprehensive short to long term plans. This package should be all-encompassing and should be clear to all parties of interest that they are not the only ones to make sacrifices for the sake of economy. When everyone is affected by the policies, there tends to be total cooperation as opposed to strong party interests. Therefore, such policies will be supported. The Italian government has put measures to increase revenue while reducing expenditure. These measures were hurried and reactive rather than proactive. Therefore, it was not all encompassing. This simply means that it has now to come up with a comprehensive plan after a careful research has been done. This plan should touch on all spheres of the economy rather than specific interest groups. In this case, the government has to set a plan to reduce its debt to a manageable level over a specified period of time.

The government has to cut down on its spending. For the past few years, the country has been having a budget deficit. Increasing income taxes at this moment in time will not be advisable as it may reduce the purchasing power of most Italians which will affect businesses and investments. However, the government has to be tighter on its spending so that it can reach a balance. Indeed the government has plans to reach this level by 2013. The economic prospects in the short term are not that good. Therefore, reduction in expenditure will be crucial if the balance is to be achieved.

The unemployment rate in Italy stands at 8.5 % of the total population. Considering that the country has a population of more than 60 million, this translates to more than 5 million. This is a high number and the government has to put measures to reduce it. This can be achieved if it promotes self employment by awarding capital to the unemployed. It can also encourage businesses to employ more by giving special tax breaks to the businesses. Italy has the lowest graduation rates in the developed countries. Of the students that join tertiary education levels, only 40 % of them will graduate (OECD, 2005). This low level has not improved as the problem still persists. This may also be a cause for high unemployment rates since most of them may be unqualified to take on some technical jobs. Therefore, the government has to give incentives as well as encouraging its citizens complete their education so that they can be employed in the technical but falling industrial factor. A high number of employed people is beneficial to the government as it earns more taxes as well as reduce its expenditure on the unemployment programs in place. These two factors will make it rely less on debt and the extra revenue can be used to service the debts.

Conclusion

Mario Monti has restored much needed confidence in the Italian economy. The bond yields have been falling ever since his appointment (Cawley, 2011). This trend should be maintained in the long term so that they fall even further. This will make repayment of debts less costly hence manageable. For the country to move forward, further borrowing should be restricted. This is especially crucial since if the current conditions persist (public debt of 120% of GDP and 4% rise in), the budget deficit will more than double next year (Macdonald, 2011). Therefore, managing it should be of primary concern. This management should not be left to the government alone. It should involve private institutions and the public at large in its fiscal planning so that the policies that are made are extensive and good to all. Lastly, it has to involve the Italian citizens in fighting tax evasion, a practice that is rife in the country. This can be achieved by encouraging buyers to demand for receipts for all transactions they make. This will ensure that these transactions are put on record and hence are accounted for in the books. This will make tax evasion more difficult and risky.

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