The Strategist

Will Italy suffer the fate of Greece?

07/25/2019 - 09:48

Italy is going through difficult times. Poverty and unemployment rates in the country are rising, the national debt has reached inconceivable proportions, the economy is almost in stagnation. Now, experts are afraid that the fate of Greece befalls Italy.

In 2018, 1.8 million households in the country lived in absolute poverty, the national statistical agency had previously calculated. This is about 5 million people or 8.4% of the population. Of these, 1.2 million people are minors. At the same time, according to statistics, more than 3 million people live in conditions of relative poverty.

Poverty indicators almost did not change compared with 2017. These numbers are very alarming for Italy. They remain at the highest level since 2005.

“We already saw this last year. Despite the economic recovery, poverty is not falling. Over the past three years, from 2016 to 2018, GDP has increased, but disposable household income has grown slightly, too little to make a real difference,” former Labor Minister Enrico Giovannini said to La Stampa.

According to Guido Alfani, a professor of economic history, “poverty in Italy is the cumulative effect of two factors: on the one hand, there is very high unemployment, and on the other - very strong structural differences that exist in the country at the regional level, as well as between north and south".

The unemployment rate in Italy rose to 10.6% in the fourth quarter of last year. Moreover, the unemployment rate in the southern regions of Italy  is almost three times higher (19.4%) than in the north (6.9%). In addition, youth unemployment remains one of the main problems there. 31.5% of Italians aged 16 to 25 years are out of work.

However, poverty is only one sign of Italy’s movement toward a crisis. The forecasts for the growth of the Italian economy leave much to be desired. According to the European Commission, Italy’s GDP grew in 2018 by 0.9%, and the economy is expected to rise by only 0.1% according to forecasts.

At the end of May, the EC Deputy Chairman Valdis Dombrovskis stated that Italy is the slowest growing country in Europe.

At the same time, the Italian government intends to implement a number of costly reforms in the social sphere. These projects require expenses that Brussels refuses to accept, the government noted.

Earlier, the Italian government, led by Giuseppe Conte, canceled raising the retirement age. The retirement age in Italy should be no higher than 62 years, Salvini explained. According to the proposed pension reform, the “quota 100” rule implies the right to retire is granted to those, whose age and time of employment makes 100 years (for example, it can be a 62-year-old citizen who had been working for 38 years).

The Conte government explains changes in the pension system by the fact that early retirement will provoke more active economic growth in the country, fueling the job market. According to the Italian authorities, the new pension system will stimulate young people to enter the labor market and should reduce youth unemployment.

The country's budget pension reform in 2019 will cost € 4 billion. This amount will double in 2020 and 2021.

“Italy made a big mistake. The law does not increase efficiency and growth of the economy. It essentially means that Italy is an economy with high taxes and high costs, with spending focused on consumption, not on investment ", - Charles Robertson, chief economist at Renaissance Capital Bank, told BBC.

Brussels does not like the new pension system either. “The solution is not perfect. It does not provide a long-term solution to economic problems in Italy,” said Valdis Dombrovskis.

The European Commission Concerned about Brussels and social security measures. In 2019, the “citizenship income” and “citizen’s pension” were approved and will require €10 billion from the budget. The minimum income of each citizen of the country will have to be at least €780 per month.

The EC is unhappy with the financing of social budget items by increasing the budget deficit.

However, the Italian authorities will not revise any of the two key reforms approved in 2018. Neither the decrease in the retirement age nor the introduction of the “citizen’s allowance” will be canceled, Prime Minister Conte stated on June 6.

The Italian authorities also promised not to raise the VAT (as the previous government planned). However, in order to fulfill this promise, the government of Italy has to revise some tax breaks, as well as step up the fight against tax evasion. The total amount of tax benefits in the country is estimated at €137.6 billion per year. The amount of funds lost by the budget due to tax evasion amounts to €110 billion, experts of the National Association of Small Businesses calculated earlier.

Time will show how close Italy is to bankruptcy. In the meantime, experts urge Rome and Brussels to come to a compromise as yet the new Italian financial crisis is only approaching Europe and the world as a whole.