Economic Fact Book: Italy

In 2011, the European debt crisis spread to Italy, which caused the interest rate on 10-year government bonds to rise to a record high around 7%. Former Prime Minister Silvio Berlusconi was forced to resign after losing his majority in Parliament. Prior to this, Berlusconi had a standoff with the ECB over reforms and bond purchases, and Angela Merkel and Nicholas Sarkozy gave Berlusconi a non-verbal no-confidence vote. Berlusconi resigned in November 2011. A technocrat unity government led by Mario Monti was then formed with the purpose of implementing reforms and austerity measures until general elections were held on February 24-25, 2013.

Following two months of political deadlock, the Democratic Party (PD), the People of Freedom (PDL) and Civic Choice (CC) finally reached an agreement on a new large coalition government with Enrico Letta (PD) as the new Prime Minister on April 27. One of Letta’s first acts was to call for more focus on growth and job creation, and less rigid focus on austerity. Mario Monti pushed through a substantial number of reforms in his first 13 months in office, after which he resigned. It is our assessment that it will not be a disaster if the new government does not undertake new reforms for a while. What is important is that it does not roll back reforms and behaves in such a way that investors can remain confident that the ECB OMT programme remains available. Letta has suspended the property tax payment, which should otherwise have been paid in this month; he also aims to abolish a 1% increase in the highest VAT rate.

Nevertheless, Letta sticks to a budget target for this year at 2.9% of GDP, below the Maastricht criteria. As a result, the European Commission recommended removing Italy from the excessive deficit procedure on May 29.

Italy has a long history of government budget deficits and high government debt. Under Mario Monti, the Italian government improved public finances substantially. The European Commission estimates that Italy ran a primary budget surplus of 2.5% of GDP in 2012, up from 1.2% of GDP in 2011, and that it will increase further to 3.1% in 2014. The yields on Italy’s government bonds have fallen markedly since July 2012, when Mario Draghi signalled that the ECB would introduce the OMT programme. Three days before the Italian elections, the ECB announced that it had bought EUR99bn of Italian government bonds under the Securities Market Programme.

After a decade of almost no growth, Italy is currently trapped in a severe recession, with negative growth since Q3 11. The housing market looks fragile, and housing starts have fallen dramatically. The unemployment rate has risen sharply and is now 11.9%.

Italy has implemented several labour market reforms but is still struggling with very low productivity growth. The business climate is hampered by significant bureaucracy. The World Bank’s Doing Business report ranks Italy as number 73, just after Romania. Corruption is deep rooted, which distorts incentives and hampers productivity growth. On Transparency International’s Corruption Perception Index Italy figures as number 72 (Romania is 66). Italy has partly specialized in labour-intensive production of luxury goods, which also limits the scope for productivity gains.

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