The future of Italian economy
An energetic debt haircut is needed to put the country back on track
A very interesting piece appeared a few days ago on Mindful Money website, discussing whether Italy will ever able to reverse the economic decline of the last twenty years.
Reminding that Italian economy stuttered in 2011 and then declined by 2.5% in 2012 in response to the credit crunch, the article recalled that the decline continued for the 8 following quarters, confirming the weakness of Italian economy.
However, according to the author, "should a recovery not come soon Italy will find itself with a lower output than which it started its adventure in this area". To understand whether there is any chance for an economic restart, the author looked at Italian economic history to get some hints.
"At the time of its political unification (1861), Italy classifies as a relatively backward country, located in the European 'periphery'. Yet, after an impressive catching-up which took place mostly during the second half of the twentieth century, Italy has managed to reach the 'centre' of the world economy". It was only in its recent past that Italian economic performance became disappointing, as in the early 1990s its boom came to a halt, as if after moving from the periphery to the center, it was going back again.
According to the author, "Italy that has the worst average growth rate in the world for the years 2001-2010", and it continues facing urgent and important challenges, the most important of which is national debt, as "the highest ratios of government debt to GDP at the end of the second quarter of 2013 were recorded in Greece (169.1%), Italy (133.3%), Portugal (131.3%) and Ireland (125.7%)". The second is raising consumers' confidence, as in October the confidence climate index decreased from 100.8 to 97.3.
At the same time, and differently from the rest of Europe, "the purchasing managers indices for Italy had shown a more optimistic sheen at the beginning of this month with manufacturing at 50.8 and the service sector showing a notable improvement to 52.7", but sales and production are not going so well.
In conclusion, the author recognizes that Italy has many strengths although its economic history seems now against it. "The legacy of the slow growth was a relatively large national debt which means that under Euro area rules it has to aim to be relatively austere which puts more downwards pressure on growth", and that cycle seems locked on repeat. However, an energetic debt haircut might make the difference and put the country back on track, and this is what Rome should focus on, now.