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Dec 7, 2016 at 06:17 o\clock

Can Italy Survive the Fall?

By Abhishek Malhotra

Italy, currently is not the only country facing problems in the Eurozone. If we look at the total growth achieved from the beginning of century up to last year, we find that both France and Germany have managed 15%. The yields are mere 1% per year, which are not impressive. Spain, even after facing a major financial crisis could gain 18%, and Ireland is more than 30% up. Whereas, Italys growth in the same period is approximately zero. In fact, using figures from IMF database, the economy is slightly smaller than what it was in 2000.

Italys gross domestic product remained flat in the second quarter of 2016 compared to a 0.3 percent expansion in the previous period and in line with preliminary estimates. It was the lowest GDP growth since the fourth quarter of 2014, as a positive contribution from foreign trade was offset by a contraction in domestic demand. Compared with the same quarter a year earlier, the GDP advanced 0.8 percent, above preliminary estimates of a 0.7 percent growth.



Net exports contributed positively to growth while domestic demand contracted. Government spending shrank 0.3 percent and investments also declined 0.3 percent while consumer spending advanced 0.1 percent. On the production side, there was an increase in the value added in both services agriculture sectors while industry contracted 0.6 percent.

Behind the jobs figures

To improve the economy, government increased spending which in turn raised government debt.

Before the beginning of financial crisis, Italys economy did expand, and later went into reverse. Looking at quarterly data, it is still approx. 9% below the peak it had reached before the crisis. Unemployment in Italy is very high, 12.7% in December. But the actual job situation is worse than what the unemployment figures suggest. The working age population who do have jobs is 55.6%. That is way below the Eurozone average of 63.8%. Spain and Greece are the only countries in Eurozone which have figures below Italys.

Big debtor

Another major problem that the country faces is government debt. Italy is one of the largest Eurozone debtor.Taking one example, as per International Monetary Fund estimates the Italian governments gross debt is more than 130% of annual GDP. Deteriorating economy growth makes it much harder to tackle this problem. Tax revenue has reduced and a stronger growth would mean that debt can be reduced which in turn will upturn the growth quickly.

Most countries in the world have primary deficits, but Italy has a surplus which is good for development and per IMF estimates the numbers even beat Germany.

Growth priority?

The last couple of years have been kind to Italy in one important aspect. Governments borrowing costs have come down drastically to a manageable level. Mr. Renzis governments main agenda appears to be faster growth and the signs point that he might be comfortable in letting government borrowing rise in the short term. Previously the effectiveinterest rates on 10-year Italian government debt were well over 7%, now which are at half the levels.It is worth mentioning that Italy remains by any measure a rich country and citizens of many other countries envy the quality of life there. But if compared to the neighbors and the rest of the world it has deteriorated. Italy could be a lot richer.

Conclusion

Can Italy end up like Greece? Greece in mid-2015 had a stagnant economy and 360 billion Euros of debt, which was 170% of GDP. Italy has a 130% of GDP debt, but being a bigger economy that amount stands at $2.1 trillion. The low Interest rates wont help if the amount is this huge and the economy is stagnant. If not taken proper measures to increase exports and cut down unnecessary government spending, in the coming years situation could be worse than what Greece was facing.

Featured Image Credits:Pixabay

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