The Strategist

Will the Italian economy repeat the fate of Greece?

02/19/2018 - 13:42

In 2017, the Italian economy showed the worst growth rates among European countries. The level of the public debt in 132% of GDP remains main threat for the republic. At the same time, analysts believe that this problem will not be solved in the foreseeable future as indicator of the volume of bad debts remains one of the highest in Europe. The situation in the economy of the southern European state already worries the EU.

Giancarlo Gallo
Giancarlo Gallo
In 2017, the Italian economy showed the maximum growth over the past seven years. According to the report of Italian ISTAT, the country's GDP increased by 1.4%. The last time this indicator exceeded the 1% mark in 2010, after which it began to decline against the backdrop of the debt crisis in the EU.

However, macroeconomic statistics did not affect the mood of analysts. Experts of the Italian Association of Craftsmen and Small Business CGIA believe that the economic prospects of Italy in the next few years are cheerless. This is stated on the organization's website.

"Although we achieved record growth over the past seven years, unfortunately, no country in the European Union in 2017 recorded a GDP growth below ours," said CGIA research coordinator Paolo Zabeo.

According to him, back in 2016, the worst case was in Greece, where GDP fell by 0.2%. Already in 2017, even Greece was able to bypass Italy in terms of growth in gross domestic product. In addition, the forecast of the Italian central bank shows that the country's economy will again start to slow down and grow by only 1.2% already in 2019 and 2020.

Now the size of the public debt remains one of the key problems of the republic. According to the Bank of Italy, it is 132% of GDP (€ 2.256 trillion), and this is the largest figure in the EU after Greece.

The forthcoming general parliamentary elections in Italy, scheduled for March 4, may be one of the reasons for destabilizing the level of the national debt of the country.

In a January report, analysts at Focus Economics noted that political instability during the election period could provoke a breach of financial stability in the country.

In addition, economists fear that the fulfilment of pre-election promises will drive the public debt out of control.

Thus, the conservative party advocates a radical reduction of taxes, an increase in state pensions and an increase in the level of welfare of the population. Politicians believe that corporate and personal income tax should be below 23% (now this figure is from 23% to 43%). Such a reform can cost the state € 50-80 billion, depending on the approved rate. The Five Star Movement, along with the Democratic Party, is also promising a tax cut, as well as an increase in the budget deficit already agreed with the EU.

Along with tax changes, all election participants promise to solve the problem of public debt. So, the center-right party Forza Italia headed by Silvio Berlusconi undertakes to reduce the volume of debt obligations by 30% in just five years. The Democratic Party plans to do the same by 2028, and the Five Star Movement intends to reduce the national debt by 40% by the same date.

As the director of the IMF's budget department Carlo Cottarelli said in an interview with Reuters, the parties offer extremely optimistic scenarios of Italy's economic development. At the same time, the measures announced by them do not interfere in any way with plans to reduce the national debt.

Analysts note that Italy still has the potential for growth above 1.4%, but only in the conditions of a complete change in its economic policy. In addition to the growing public debt, as well as bad loans in the banking sector, there are a number of other important issues, such as fiscal policy, bureaucracy and political corruption.

Besides, the unemployment rate is very important, which is now estimated at about 11%. Entrepreneurs cannot create jobs against a background of a number of difficulties in lending to small and medium-sized businesses. In conjunction with the likely onset of the banking crisis, this problem can seriously damage the state's revenues.


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