Italy’s Economic Challenges - English

The Elephant in the Room

By Stefano Casertano20.04.2015Economics

Lamentations about the state of the Italian economy have become so commonplace, Italians barely react to them. But Italy’s public debt problem has proven big enough to make a splash.

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State Library of New South Wales

Italians are awesome self-deprecators. Considering that they live in “the most beautiful country in the world,” Italians are surprisingly ready to point out limits and problems in every aspect of life—be it Italian soccer or food. Reasons for this may range from fake-modesty to a taste for complaining. Yet, never attempt to criticize Italy if you are not Italian. They will be offended and think you are “just another arrogant foreigner.”

This interesting national attitude may well explain Italian reactions to the rollercoaster of news concerning developments in the national economy. In February the news claimed that “Italy was out of the recession,” with a forecasted GDP growth by 0.1% in the first quarter of the year. The cold shower came a few weeks later: the national statistical institute “Istat” claimed that the GDP contraction in 2014 was worse than the government had forecasted: -0.4% instead of -0.3%.

And, well, few people cared. The government issued ritual comments on the “we’ll see, we’ll do” tone. The right-winged commentators pointed out that the economic plans of the government are based on a growth target of 0.7% in 2015, yet the ECB quantitative easing aid represents 0.5% of the growth, and the rest is a welcomed contribution from the lower oil prices. In other words, “Italy is still stalled,” as the newspaper Il Giornale claimed. As usual, few people paid attention to such criticism, possibly because of an inflation of such comments since the early 2000s.

A Change in Tone

Reactions gained a much different tone when the _Wall Street Journal_ published a comment claiming that “Greece may be the canary in the eurozone coal mine. But Italy is the elephant in the room”. A detailed showcasing of Italy’s economic malaise followed. And this time, things were taken a little more seriously. We can say that, in this case, Italians did something new after getting offended: they opted for a “yes, but” policy.

The Italian economy is at the level of 2000; basically the country walked blindfolded through the euro dark ages. At 12.7% unemployment is at level not seen since the mid-70s. The combination of two factors, limits imposed by the euro and unemployment numbers, make clear that even if Italy were to resume growth, it would be a “jobless” one, with acute concentrations of wealth according to class and geography. Quite possibly, wealthier people in the north would profit from it, and the lower-middle classes in the south would not.

Economy Minister Pier Carlo Padoan met with reporters a few days after the _Wall Street Journal_ article explaining that the country’s real burden, which makes any real change of path unthinkable in the short term, is the public debt load. It is forecasted to grow also in 2015 (it is currently at 132.5% of GDP), yet “in 2016 it will start reducing, and in 2018 it will reach 123.4% of GDP.”

It says a lot about a country if it sees a public debt target of 123% of the GDP as a significant goal, yet this is the country that Italians inherited from their fathers, and there is not much room for different choices. Padoan also made clear that the government is ready to sell stakes in assets such as public energy utility company ENEL, Poste Italian, and the railways. This “will bring a revenue of up to 1.8% of the GDP between 2015 and 2018.”

There are big hopes that the plan may work, yet there are also widespread fears that it may not. Rumors claim that in order to achieve his goals, Padoan will have to ask for a raise in the VAT in 2016, reaching the staggering level of 24%. Privatizing state assets and raising taxes may represent a dangerous model contributing to further increases in economic polarizations (owners vs. salary workers), and social measures cannot be avoided. Otherwise whatever may work economically, won’t do socially—and the elephant in the room will explode.

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