Economy and Trade
One of the founder members of the European Union, and among the first wave of entrants into the eurozone in 2002, Italy is closely integrated with the European Union. The country has developed remarkably since World War II. Originally based upon agriculture, its economy is now focused upon services and manufacturing. In 2008, the International Monetary Fund (IMF) ranked Italy as the seventh-largest economy in the world in dollar terms.
However, the country faces formidable challenges. It has the lowest birth rate in Europe, and a population that is forecast to decline significantly over the next 50 years. In addition, much of the country’s industrial output is generated by small and medium-sized firms, which are falling further and further behind their competitors in technological terms. The country has been labeled one of the PIIGS—along with Portugal, Ireland, Greece, and Spain—a term that covers the most highly indebted and weakest countries in the eurozone.
Economic Policy over 12 Months
Italy has been more restrained than other EU countries in using fiscal pump-priming to offset the impact of the global downturn on the economy. This is almost certainly because of the high level of public debt, which represents the highest indebtedness ratio in the European Union.
Although Greece has been the focus of sovereign debt concerns in the eurozone in early 2010, Italy also remains vulnerable. Thus, even though the government adopted only a modest fiscal stimulus, its budget deficit rose in 2009 to 5.2% of GDP, while the public debt reached 115%, second only to Greece in the euro area. The government also now has a primary deficit—in which spending before interest exceeds revenue—for the first time since 1991. The government has promised Brussels that the deficit will be back to its 2008 level of 2.7% by 2012.
Because of its fiscal weakness, the government concentrated on encouraging the country’s banks to accelerate lending in 2009. Fortunately, Italy’s banks have weathered the global financial crisis better than many of their European counterparts. None of the banks has failed or fallen short of regulatory requirements, and the banks have continued to fund themselves through bond issuance to domestic retail investors.
In order to support the country’s large car industry, which has seen demand plummet since the final quarter of 2008, the government announced in February 2009 that it would subsidize car purchases by providing €1,500 to every motorist who traded in a car that was at least 10 years old, for a new, more fuel-efficient model. However, in 2010, the government decided not to renew the incentives for buying less polluting cars, which expired at the end of 2009 but could be applied to cars registered until March 31, 2010.
The European Central Bank (ECB) determines monetary policy in Italy. The ECB was slower than other central banks to loosen monetary policy amid the global financial crisis of 2008–2009. In March 2009, the ECB cut its key interest rate from 2.0% to 1.5%, the lowest since it started setting euro rates in January 1999. However, US and Japanese rates were, in effect, already at zero by March 2009.
Prior to the country’s entry into the eurozone, Italy relied on devaluation to maintain its competitiveness. That option no longer exists, leading some commentators to ponder whether the eurozone can remain intact, given that countries such as Spain and Greece face similar problems to Italy. By April 2010, the ECB rate stood at 1%, whereas US and Japanese rates remained at close to zero.
Economic Performance over 12 Months
Italy’s economic performance has deteriorated markedly since the late 1990s. During the current decade, economic growth in most years has been below that of comparable EU countries. In 2005, 2006, and 2007, Italy recorded growth of just 0.5%, 1.8%, and 1.5%, respectively, while in 2008 the economy contracted by 1%, according to the official statistics—the worst decline since 1975.
Furthermore, the economy suffered one of the worst contractions of the largest eurozone economies in 2009, shrinking by 5.1%. The recovery also appears fragile. In the fourth quarter of 2009, Italy reported a 0.3% fall in GDP after a 0.5% rise in the previous quarter. In addition, the high level of public debt suggests that any recovery will prove painfully slow. The government is forecasting 1.1% growth in 2010 and 2% in 2011.
However, in April 2010, credit rating agency Standard & Poor’s cut its 2010 growth forecast for Italy to 0.5%, from a previous 0.7% forecast. “Feeble consumer demand on the back of falling earnings, anemic capital spending because of damaged corporate profitability and export prospects penalized by weak competitiveness are holding the Italian economy in check,” S&P said. It added that medium-term growth likely to be thwarted by structural weaknesses, such as productivity growth and deteriorated competiveness, though the weaker euro is likely to provide a fillip to exports.
The recession has taken a toll on the jobs market. In January 2010, the unemployment rate rose for the eighth straight month. Unemployment climbed to a seasonally adjusted 8.6% from 8.5% in December, according to Italy’s statistics office Istat. Italian industrial production unexpectedly fell in the last month of 2009 as businesses shed jobs and announced new layoffs on lower demand.
However, Italy’s inflation rate for 2009 fell to the lowest level in 50 years, figures that underline the weakness of the economy. According to data issued by the national statistics office, in 2009 inflation rose 0.8%, down from a 3.3% increase in 2008, the highest in 12 years. Year-on-year inflation in December rose by 1%, while there was a 0.2% surge in the consumer price index over November, Istat added.
Support for Inward Investment and Imports
Italy’s investment climate remains poor, according to a US Commerce Department report published in 2009 (Italy Country Commercial Guide, see More Info). Furthermore, the report said 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.” The report added that Italy’s “poor investment climate explains much of its low economic growth rate.”
A government agency, Invitalia, provides assistance to companies “in all stages of the investment process.”
As a member of the European Union, Italy applies the customs laws and trade regulations of the Union. Decisions regarding quotas or customs suspensions to be applied to goods imported into Italy are currently taken at the Community level.
Invitalia publishes a guide to the Italian tax system, including all exemptions, on its website.
GDP growth: −5.1% (official, 2009)
GDP per capita: US$30,300 (2009 est.)
CPI: 0.6% (2009 est.)
Key interest rate: 1.0% (April 2010)
Exchange rate versus US dollar: €0.7338 (2009)
Unemployment: 7.5% (2009 est.)
FDI: US$386.7 billion (December 31, 2009 est.)
Current account deficit: −US$55.44 billion (2009 est.)
Population: 58,090,681 (July 2010 est.)
Source: CIA World Factbook except where stated