Faced with a myriad of problems ranging from uncertainty in political dynamics, an economy that slipped into a technical recession and an unsustainable expansionary budget, the year ahead for Italy seems paved with challenges.
Last month, the Warwick Economics Summit sat down with Professor Andrea Sironi, the Chairman of Italy’s stock exchange, to discuss the state of Italy’s future.
The 2008 financial crisis left the Italian economy some 6 per cent smaller and moved three million more people to poverty. In 2017, poverty is at its worst in 12 years, data from Italy’s national statistics bureau (ISTAT) reported. Those living in “absolute poverty” rose to 8.4 per cent of the population last year and were up 7.9 per cent in 2016, the highest since current records began in 2005.
To boost its flattering economy and to reduce the poverty rate, The League and Five Star government passed an expansionary budget which includes populist measures such as a guaranteed income for the poor, where poor families will get €780 per month provided recipients are actively seeking work. Besides being significantly expensive, costing €22.9 billion over the next three years, a government guaranteed income would increase dependency on the state and cause further strains on the government’s coffers.
According to Prof. Sironi, the government should attempt to address the structural weakness in the banking and financial sector instead of finding short-term fixes through populistic policies.
“[In 2019], we will need to see if the policies implemented by the government will be structural reforms aimed to increase the competitiveness of the country and the Italian companies, or will they pursue policies that are populistic in nature and not in favour of the economy,” Prof Sironi said.
Currently, Italy’s central government debt is the third-largest in the world at €2.3 trillion and the country’s debt to GDP ratio stands at 131.8 per cent, the second highest in the Eurozone after Greece. Prof Sironi said that the expansionary budget will not be effective in boosting the economy because it leads to a lack of credibility in public debt management and an increase in interest expense that crowds out investment from the private sector.
“The proper policies should be oriented towards cutting expenditure and cutting taxes so that this would stimulate investments and benefit the economy as a whole. Indirectly, it would also benefit the poor people and at the end of the day, those who will be damaged most by these policies are the weakest ones,” he added.
In turn, uncertainty in domestic politics and ineffective public policy will be one of the main factors that affect Italy in the year ahead, Prof. Sironi said. His view is in line with Fitch’s rating of Italy’s sovereign credit at BBB, commenting that Italy’s outlook for 2019 remained negative.
“GDP growth has stalled as domestic policy uncertainty and weaker external demand has dragged down investment, while private consumption growth has also lost momentum,” Fitch said in its report. “There continues to be a relatively large degree of uncertainty over the fiscal forecast beyond 2019, linked to political dynamics.”
Being the Eurozone’s third-largest economy, Italy is simply too big to fail. Coupled with the third largest debt in the world, a debt crisis in Italy could trigger a global financial catastrophe. Crucial structural reforms are sorely needed in Italy, which will result in stronger growth and stability for both Italy and the Eurozone.