The Lehman bankruptcy plunged the global economy into a severe recession. While Germany quickly recovered from the financial crisis, Southern European countries suffered a further decline in their economic output in 2012 and 2013. After Greece, Italy suffers the most from the aftermath of these two economic slumps.
The Italian economy today faces numerous economic difficulties. The high level of debt puts pressure on creditworthiness and unsettles investors. Necessary structural reforms are not taking place. In the World Economic Forum’s Global Competitiveness Report 2017-2018, Italy ranks only 43rd out of 137 countries, behind countries such as India, Indonesia, Chile and Azerbaijan.
Dip in growth not yet offset
Following the financial crisis in 2008/2009 and the economic slump in 2012/2013, the Italian economy struggled to achieve even low growth rates. Setting the average real GDP for 2007 at 100, a look at the four crisis countries in Southern Europe – Italy, Greece, Portugal and Spain – shows only Greece and Italy still unable to reach 2007’s GDP level (the year before the Lehman bankruptcy) (see Figure 1).
Unemployment remains high after the financial crisis
Weak GDP growth is having a negative impact on Italy’s labour market. In the summer of 2018, Italy had the third-highest unemployment rate in the EU at just over 10 per cent (see Figure 2). Alarmingly the unemployment rate is over 30% for young people under the age of 25.
Government debt explodes
Weak economic growth means low government revenues. At the same time, public spending to cushion the impact of high unemployment is increasing. The result, of course, is a rise in public debt. At the end of March 2018, government debt in Italy was equivalent to more than 133 percent of GDP (see Figure 3). By way of comparison, according to the rules of the so-called Maastricht Treaty, government debt in an EU country should not exceed 60 percent of GDP (Article 1 of Protocol No. 12). Whether Italy can pay off this mountain of debt without outside help is questionable.
The situation is made even more difficult by the fact that Italy’s private banking sector has many non-performing loans on its balance sheets. At the end of 2017, the volume of these loans was estimated at just under 187 billion euros (page 3). In absolute terms, this is the highest value in the euro area. But there are rays of hope:
The current account balance is in the black
The current account balance, which covers all economic transactions between a country and the rest of the world, has been positive in Italy since 2013. This means that Italy earns more money from abroad than it pays to the rest of the world. reducing external debt. If the current account balance is set in relation to GDP, Italy now has the highest value of all four Southern European crisis countries (see Figure 4).
And exports are on the rise again
Italy’s improved current account status is due not only to a decline in imports, but also to an increase in exports, signalling that Italian goods and services are regarded as competitive by the rest of the world. Between 2016 and 2017, exports increased by more than USD 50 billion (see Figure 5).
Perhaps the greatest challenge for Italy’s ability to grow economically after the financial crisis though is regaining confidence in the country’s political long-term stability. Without confidence on the political front, there will be no investment and a continuing struggle for economic growth.
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