The Strategist

Italy is on the Verge of Collapse

07/29/2015 - 16:39

Emergency meetings are coming one after another. Eurozone countries are trying to save Greece. Meanwhile, experts are sounding the alarm: if a crisis begins in Italy, the Greek problems will seem a trifle.
Huge debt, economic stagnation, bloated and inefficient state apparatus - a few years ago it seemed that Italy would inevitably have slid into crisis and will drag the entirety of Europe. Now the dire predictions subsided, and financial markets are no longer set against the Italian.

However, the third-largest economy in Europe is marking time, and no one can decide where to go next. Here's an example: a traditional confectionery in the northern area of Rome. In fact, for Rome it’s a tradition to close an enterprise for the whole of August, because all are leaving on vacation. Nevertheless, in recent years many of the Romans stay at home to save money. That is why the confectionery is working all summer. However, the mistress says, the buyer began to count money. They take just something special, mostly baking at home.

The situation in Italy is changing, and the Italians realize that it is not temporary difficulties but a new norm. However, in the last quarter, industrial production grew by 3 percent. Young and energetic Prime Minister Matteo Renzi immediately called it proof of the effectiveness of the undertaken reforms. These include preferences for investors, tax breaks for 80 euros for low-income people and reducing social contributions from wages. Renzi takes credit for the fact that the recently a slight decline in the number of unemployed and the increased number of permanent employment contracts have been observed.

Some experts say that the government is simply throwing dust in the eyes. The fact that many of the unemployed are dropped out of the statistics, because they are simply not registered at labor exchanges anymore. The official unemployment rate is 12.5 percent. The growth of industrial production is not the result of the reform, but cheap oil and the weak euro, artificially lowered by the European Central Bank flooded Eurozone with cheap money, analysts say. As a result, it is easier to get loans, and the competitiveness of Italian products in the world market has improved.

Matteo Renzi wants to convince everyone that things in Italy are going smoothly. He promises his fellow tax breaks totaling 45 to 50 billion euros over the next 5 years. In particular, the government proposes to abolish the estate tax that the owners themselves use for housing.

For all of that, Italy's public debt has exceeded 135 per cent of GDP. The situation with debts is worst only in Greece. Matteo Renzi for a time supported the demands of Greece to ease austerity. However, during the negotiations at the summit of the Eurozone in Brussels, he eventually joined the camp of those who urged the Prime Minister Alexis Tsipras accept the creditors’ requirements. the fact that if Greece declares a default and exit the eurozone, Italy will also lost up to 40 billion euros played the decisive role.

Large financial speculators attack is the biggest threat to Italy - said the former Minister for the Environment Alfonso Pecoraro Scanio. Italy has already experienced this attack several years ago, but the ex-minister believes that now the situation in the country is more stable, because the government has conducted a series of reforms, as demanded by the financial markets.

Like many Italians, he fears the possibility of a domino effect, if the situation in Greece do not become controlled. "The project of European integration is based on solidarity, overall growth and preventing conflict. And what we see: a kind of economic war between Germany and Greece", - complains Scanio. Nevertheless, he adds that, of course, the Greeks must be made to carry out reforms.

How all this is consistent with Renzi’s Government's intention to reduce taxes? "Taxes are needed to pay for certain public services. And how to pay for them, if the tax comes less? In addition, taxes are needed to tidy up the budget and not to fall into new debts," - stressed the head of the Italian Central Bank, Ignazio Visco.


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