SOBERING LOOK AT ITALIAN ECONOMICS
Italy is not alone among southern European countries with economic strife. In fact, they are relatively well off compared to neighboring Greece, Spain and Portugal. But that isn’t saying much.
Italy’s GDP growth for 2013 was -1.8 percent. Unemployment remains above 12.7 percent and the 10-year-government bond rate is 3.59 percent.
Although these numbers are sobering, they are not the main problem. Italy’s sovereign debt now rests at 130 percent of GDP. As a reference, Germany’s debt to GDP is only 80 percent. This may not be the best comparison because the Bundesbank and German voters have ingrained in their psyche austerity is the only sensible means to economic stability, a policy which in certain economic circumstances works and in others does not. The problem in this instance is, Germany is faring well and Italy is in despair and since Ms. Merkel, the most powerful woman in the world, is the voice of austerity and the Christian Democrats, Italy must lick their wounds and comply with the painful economic changes necessary to shore up their feeble economy.
Heeding the call of change, Italy has a new and very young Prime Minister, Matteo Renzi. Renzi, 39, took on the obligation of assembling a new government following the resignation of Enrico Letta.
His first task is to find a way to manage the amount of sovereign debt Italy holds. However, with a negative growth rate, the government has less tax revenue each year with which to pay down this debt burden.
The good news is, government borrowing costs have decreased over the past two years from a high of over 7 percent on the 10-year-government bond to nearly half that now. This is in large part the result of Silvio Berlusconi leaving politics (and consequently being prosecuted on charges from tax evasion to sex with an underage Moroccan prostitute). Also, Mario Draghi, head of the European Central Bank, did much to enhance Italy’s economic outlook in stating the “ECB will do whatever it takes to save the Euro.”
With the vibrancy of youth and free from his predecessors distracting affiliations to geriatric bureaucracy, Renzi boldly pursues the most aggressive agenda of any Italian politician in recent history. These reforms include a timeline punctuated by changes to employment law in March, streamlining public administration in April and an overhaul of the taxation system in May. If successful, Mr. Renzi can enjoy June with a nice glass of Prosecco, perhaps at the side of fellow Italian Draghi.