Research Euroland: Fact Book Italy‏

Italy has been through a couple of chaotic years both economically and politically. During 2011, the European sovereign debt crisis spread to Italy, which caused the interest rate spread on 10-year government bonds to Germany to rise to a record high around 7%.

Former Prime Minister Silvio Berlusconi was forced to resign after losing his majority in the Parliament and was replaced by Mario Monti, former European Commissioner, who formed a unity government with the purpose of implementing reforms and austerity measures. The current government is expected to remain in office until the general election that is set to take place in April 2013.

With the austerity measures being implemented, the Italian government has improved the public finances substantially. IMF is forecasting that Italy will run a primary budget surplus of 3.6% of GDP next year. The yields on Italy’s government bonds have dropped markedly since July when Mario Draghi signalled that the ECB would introduce the OMT programme.

The relatively good expenditure discipline arises even though the economy was hit hard by the financial crisis. Italy is currently trapped in a severe recession, with negative growth since Q3 11. We do not expect positive growth before mid-2013.

Productivity trend growth has been negative since 2000. There are several reasons for this unfavourable development: The costs associated with dismissal from permanent jobs remain high. The economic structure with many small companies, which could impede domestic competition. The country struggles with corruption, which distorts incentives and thus hampers productivity rowth. Italy has partly specialised in labour-intensive production, which limits the scope for productivity gains.

Italy has made several deep-seated labour market reforms. This has successfully reduced the unemployment rate and despite a prolonged recession Italy’s unemployment rate is below the euro area average. The reforms should prove advantageous to Italy in the longer run, in particular as population growth is set to be negative in the coming decade. Italy is relatively well prepared for population ageing, with a pension scheme that will give rise to only minor increases in public expenditures, according to the European Commission.

To Read the Entire Report Please Click on the pdf File Below.