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Italy - Economy

Italy has the third-highest public debt in the world. Italy's public debt totals 2.3 trillion euros ($2.7 trillion). That represents 132 percent of Gross Domestic Product (GDP) which is more than double the 60 per cent target imposed by Brussels on EU members. Italy, the eurozone's third largest economy, has struggled since the 2007-2009 financial crisis under an enormous debt pile.

The EU Commission on 23 October 2018 demanded unprecedented changes to the Italian draft budget for 2019, urging the populist government in Rome to bring their spending plans in line with the bloc's fiscal rules. "Today for the first time the Commission is obliged to request a euro area country to revise its draft budgetary plan," said EU Vice President Valdis Dombrovskis, adding that the bloc's executive arm saw "no alternative" to the rebuke. The decision by the Commission was the first time it exercises the power, obtained during the sovereign debt crisis in 2013, to send back a budget of a eurozone country that violated the rules. At the same time, Brussels asked Rome to submit a new 2019 draft budget, threatening Italy with disciplinary action if it didn't comply with the demand.

Italy's troubles run deep: by 2014 the country's economy had shrunk for three consecutive years, shrunk by nearly 9 percent since 2007 and shrunk by 17 percent in per capita terms over the past decade. Despite early signs of a possible economic turnaround, the jobless rate continued to climb in early 2014. Consumer confidence was near an all-time low. The government's hands were tied by a massive debt level difficult to confront with tax levels already among the highest levels in Europe and government services already slashed to the bare minimum.

Italy is the worlds eighth largest industrial economy. It has few natural resources, the most important being natural gas reserves - in the Po valley and offshore in the Adriatic Sea - and some oil deposits. Most raw materials needed for manufacturing and more than 80% of the countrys energy are imported. Italys economic strength is in the processing and manufacturing of goods, primarily in small and medium sized family-owned firms. Its major industries are tourism, precision machinery, motor vehicles, chemicals, pharmaceuticals, electrical goods, textiles, fashion, clothing and footwear.

Against the backdrop of structural rigidities and subdued demand, growth is projected to reach 1.1 percent this year and about 1 percent in 201718 (on planned policies). Risks are tilted to the downside, including from financial market volatility, Brexit, the refugee surge, and headwinds from the slowdown in global trade.

Buoyed by exceptionally accommodative monetary policy, favorable commodity prices, supportive fiscal policy, and improved confidence on the back of the authorities wide-ranging reform efforts, the economy grew by 0.8 percent in 2015 and continued to expand in the first quarter of 2016. At the same time, labor market conditions have been gradually improving, and non-performing loans (NPLs) appear to be stabilizing. Still, the challenges ahead are significant. Productivity and investment growth were low; the unemployment rate remains above 11 percent, with considerably higher levels in some regions and among the youth; bank balance sheets are strained by very high NPLs and lengthy judicial processes; and public debt inched up to just under 133 percent of GDP, a level that limits the fiscal space to respond to shocks. According to figures published earlier in February 2013 by the European Commission, Italy's national debt was equivalent to 127.1 percent of annual economic output at the end of 2012. That percentage figure is the second worst within the eurozone, behind Greece. Italy has the third largest economy in the eurozone, but its economic growth is stagnant and the country has accumulated a staggering $2.6 trillion in public debt.

The recession extended throughout 2012, completing six consecutive quarters of contraction in economic activity. As a result, in 2012 as a whole, real GDP is estimated to have declined by 2.2%. Domestic demand fell significantly, as high uncertainty, tight financing conditions and the impact of fiscal consolidation hit consumption and investment. This led to a collapse in imports, while exports increased on the back of sustained demand from non-EU trade partners. Therefore, net exports stemmed the real GDP drop and the trade balance turned positive for the first time since 2004.

Italy's borrowing costs topped 7 percent in November 2011, the threshold that forced Greece, Ireland and Portugal to seek international bailouts. But with Italian lawmakers on track to adopt the austerity plan, the interest retreated below the 7 percent mark. The Italian austerity measures include the sale of $20 billion worth of government property, opening up closed professions and increasing the country's retirement age from 65 to 67 by 2026. Most of the new plan will kick in after the next Italian elections in 2013.

Italy continues to grapple with budget deficits and high public debt--4.6% and 119% of GDP for 2010, respectively. Italy joined the European Monetary Union (EMU) in 1998 by signing the Stability and Growth Pact, and as a condition of this Euro zone membership, Italy must keep its budget deficit beneath a 3% ceiling. The Italian Government has found it difficult to bring the budget deficit down to a level that would allow a rapid decrease of the debt. The worsening economic situation undermined this aim, and the deficit grew well above the 3% ceiling in 2009 and 2010, to 5.4% and 4.5% respectively. The government plans to bring the deficit down to 3.9% in 2011 and below 3% in 2012. Modest GDP growth is likely to jeopardize this effort.

Italy's economic growth averaged only 0.8% in the period 2001-2008. GDP contracted as the Euro zone and world economies slowed, decreasing 1.3% in 2008 and 5.2% in 2009 largely due to the global economic crisis and its impact on exports and domestic demand. GDP recovered only part of the ground lost, growing 1.3% in 2010. In 2011 Italys GDP is expected to grow below the EMU countries' average.

Italy's economy, the seventh largest market economy in the world, is fully diversified. Small and medium-sized firms dominate the Italian economy. Family-owned companies account for 93 percent of all Italian companies and 85 percent of GDP. In the U.S., family-owned companies represent 96 percent of companies, but account for only 40 percent of GDP. Germany, France, and the U.S. remain Italy's most important export markets. Industrial activity is concentrated in the north -- one of the most prosperous areas in Europe. By contrast, the center and the south are less developed. Unemployment in some southern areas is three times that of the north and per capita incomes are substantially lower. As emerges in the data of the national statistical institute Italy's economic structure is similar to that of the most advanced European nations.

From the economic point of view, since the end of the Second World War Italy has been one of the European continent's most dynamic countries, transforming itself from an essentially agricultural nation to a major industrial economy. Mussolini's effort to make Italy a world military power proved disastrous for the national economy. Italy also suffered tremendous damage from the war. Postwar estimates indicate that industrial damage was more than 20 percent and that obsolescence and wear and tear reduced industrial capacity even more. Industrial -- production in 1945 was only about 25 percent of what it had been in 1938, and agriculture production was reduced by about 40 percent over the same period. Damage to the transportation network, shipping, and vehicles was also severe. Italy's recovery from these dire economic conditions exceeded even the most optomistic forecasts. Between 1950 and 1963, the economy's growth was amazingly stable. From 1958 through 1963 Italy's economy was the most rapid growing in Europe.

The high rates of economic growth that Italy had enjoyed in the 1950's, and as lower but still healthy pace in the 1960's, disappeared in the 1970s. The Italian economy suffered low investment and growth, high rates of inflation and balance of payments difficulties. These difficulties erupted into two severe crises - in 1974 and 1976 - that required exceptional policy measures, external financial assistance, and: the acceptance of externally-imposed economic conditions which limited the policy authorities' scope for economic management.

Two-thirds of Italy's Gross Domestic Product (approximately 69%) was represented by the services sector, whose strong point is tourism. Approximately 29% of the national income was in industry (including the construction sector) and the remaining approximate 2% derives from agriculture. The strongest industrial sectors are machinery and apparel/textiles. The geographical distribution of the production of the nation's wealth is as follows: approximately 31.8% of GDP is produced in the Northwest regions of the country, 22.3% in the Northeast regions, 21% in the regions of Central Italy; finally, approximately 24.8% can be attributed to the regions of Southern Italy.

One of the Italian system's peculiarities lies in an "industrial cluster" model, well-established in a clearly defined area and consisting of a dense fabric of small and medium sized enterprises, each specialised in a specific phase of production. Thanks to this model Italy is a nation in which entrepreneurial initiative is highly developed and where entrepreneurial autonomy has led to the development of creativity and concentration on the beauty and good taste of those finished products that have raised the "Made in Italy" to world fame. The Italian economy is not only small enterprise however. There are many large-scale industrial groups that contributed to the industrial history of the country and to its development.

"Made in Italy" does not only mean elegant apparel, sophisticated design and advanced machinery, but it also, and above all, translates into exports that contribute substantially to a national economy sustained and represented by the labour and initiatives of large-scale enterprises together with the vast network of small and medium-sized ones.

Agri-alimentary, machinery, apparel/textiles, industrial design and furniture and furnishings production are the sectors that not only are the most important in terms of the income, employment and number of firms, but which also underpin Italian exports throughout the world and thereby make a significant contribution to our country's trade balance ). Despite the aggressive presence of China and other countries on the world market, Italy ranks eigth in the world among major exporting counries and sixth amnf the world's major importers.

The Italian economy is also supported by another important pillar: tourism, thanks to its inestimable archaeological and artistic patrimony. Indeed, according to Unesco, more than half the world's artistic/historic patrimony can be found in Italy, a country that counts hundreds of archaeological sites and over 2000 museums.

Tourism is one of the Italian economy's most important items: every year foreign travellers spend over 30 billion euro in our country, while Italians travelling abroad spend around 18 billion euro. Thus it is calculated that the sector of tourism, including the activity it generates, contributes approximately one-third to the overall GDP by creating over one million jobs.

A January 2008 article in London's Financial Times likened investing in Italy to "driving with the brakes on". It cited the dearth of global names and brands in the Italian economy and chronicled the tribulations that have dissuaded firms from AT&T to British Gas from investing in Italy. The author asked rhetorically why there are over 400 Burger Kings in Spain, 500 in the UK, but only 39 in Italy. The conclusion -- that an onerous public sector, unclear rules, and latent economic nationalism were to blame -- tracks with post's assessment of Italy's current investment climate. It is important to note that this negative assessment of Italy's investment climate is shared, in essence, by the Italian Trade Commission, by leading Italian business organizations, and by almost all of the international organizations that have examined the situation.

Italy's poor investment climate explains much of its low economic growth rate. Over the last ten years, Italy's economy has grown significantly more slowly than the rest of Europe. Former U.S. Ambassador Spogli saw this "growth gap" as a major threat to Italy's ability to continue as an effective international partner of the U.S. This problem was deemed to be so serious, that the Ambassador took the unusual step of launching a major Embassy initiative - "The Partnership for Growth" in an effort to address it.

While the Government of Italy (GOI) officially maintains a welcoming posture to foreign investment, it has made only modest progress in addressing the structural economic disincentives that discourage investment, innovation and greater economic dynamism.

Significant stumbling blocks to investment remain, however, such as rigid labor laws, high input costs and taxes, and inefficient public services, particularly a slow judicial system. The current government has sought to reform public administration, prompting protests from public sector employees long accustomed to a lax working pace and environment. The GOI also introduced controversial measures to reform public education in a bid to improve the competitiveness of Italy's human capital. Otherwise, the government's economic team has been engaged primarily in efforts to mitigate the global financial crisis' effects on Italian households and businesses, leaving structural reforms for another day. In the initial days of the world-wide equity markets' severe declines, Italian policy-makers publicly denounced the prospect of foreign sovereign wealth funds acquiring control of Italian companies (see para. 12), and the government instituted measures to strengthen firms' defenses against hostile takeovers. Finally, Italy's high debt-to-GDP ratio will constrain the government's efforts to further stimulate investment with additional public spending or lower taxes.

The 2008 "Index of Economic Freedom," published by the Wall Street Journal and Heritage Foundation, ranked Italy as having the world's 64th freest economy. The study highlighted government interference in the economy, corruption, and a slow court system as contributing to Italy's ranking below less developed nations such as Uganda, Belize, Jamaica and El Salvador. A lack of judicial effectiveness was also underlined by Italy's abysmal ranking of 156 out of 181 countries surveyed by the World Bank in its 2008 edition of "Doing Business." This compares to the average score for OECD members of 33. U.S. companies have been frustrated by the seemingly never-ending court proceedings that can tie up everything from the resolution of simple contract disputes to attacks against major investment projects. The inability to obtain timely judicial determinations represents a significant additional cost of doing business in Italy.

The Foreign Investors Committee of Italy's industrial association Confindustria conducted a survey of 60 foreign companies operating in Italy, including Coca Cola, GE, Glaxo-SmithKline and others. The results highlighted bureaucracy, costly and inflexible labor, and complex, lengthy legal and taxation systems as the primary barriers to foreign direct investment.




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