EAST/WEST Italy: better off than she seems
A few days before the general elections, the markets aren’t reacting to the potential instability that may follow. It could be that a close look at the data reveals a country with problems but fewer than perceived by public opinion abroad.
- Thursday, 01 March 2018
We have compared the perceptions held by Italian citizens with the facts. The results are often surprising.
Growth: the first perception is that Italy is bringing up the rear in Europe, that it has been doing so for the last 20 years, and that there’s no chance of reversing this trend. Let’s take a look at the figures: the average real annual growth of Italy’s GDP over the last 20 years (1996–2016) equals to 0.5%, compared to +1.5% for the eurozone. A very considerable difference. But what happens if we divide that period into separate decades?
During the first decade, from 1996 and 2006, Italy’s average annual GDP growth equalled 1.5%, compared to 2.3% for the euro area. There is still a difference, but it not as relevant as the previous one. And in any case, a tendential growth of between 1.0% and 1.5% would be sufficient to quash fears that Italian public debt might be unsustainable. Moreover, after a decade of crisis, Italy once again posted a 1.6% GDP growth (against a eurozone average of 2.3%) in 2017, which should be maintained in the coming years. Where things actually went poorly was during the second decade (2006–2016). The ItalianEuropean differential during that period was highly disconcerting (-0.6 versus +0.6). What is worse, Italy was always in negative territory. But the circumstances were exceptional. Not just one, but two violent crises have over whelmed the country over the last ten years. First the financial crisis, followed by the eurozone's sovereign debt problem. And when the financial crisis first struck Europe, Italy was the only major country not to benefit from a coordinated financial stimulus (as did Portugal, Spain and Ireland). Furthermore, when the sovereign debt crisis overlapped with the financial one, one of the largest tax constraints ever seen in history was adopted (and without an official programme being issued by the IMF). Therefore, in these last ten years, during which time there has actually been an average annual drop of 0.6% a year in Italy’s real GDP, we have not been witnessing a downward structural tailspin, but rather the impact of two extraordinary events. What’s more, during the previous decade, Italy’s GDP had not been artificially bolstered by the real estate boom, as was the case in Spain and Ireland. If we mean to improve the growth trend, now that it is back to acceptable pre-crisis levels, one could work to increase the participation rate of women in the labour force (a number that includes employment and active job-seeking). That would bridge the gap that stills separates Italy from Germany and provide an additional 1.5% to Italy's GDP every year.
Women: the second perception is that women in Italy are still tied down in traditional family roles and therefore do not play an active part in society. This trend is measured by what is called the labour force participation rate (which refers to employment and active job seeking). This rate shows Italian women lagging behind German women by nearly 20 points. That may be true, but it’s also true that the rate has been consistently increasing over the last ten years, reaching 49.2% in January 2018 (Istat figures), the highest level ever recorded. The simplest and most appropriate measures that the Italian government could adopt in order to structurally improve GDP growth would be implementing policies that encourage women to become actively involved in the labour market. If Italy managed to increase female labour force participation by including even half of the women who currently are not part of the workforce, it could reach German levels within 10 years (75%), and the Italian GDP would grow approximately by another 0.7% a year!
Competition: the third, long-standing perception is that Italy is not competitive. One must, of course, take into account the fact that German productivity has grown by 84% since 1979, compared to Italy’s miserly 43%, notwithstanding the famous and much desired (by those who don’t understand the implications of these figures) competitive devaluations of Italy’s lire. But Italy is not starting from scratch: it is the third largest economy in the eurozone and the eighth in the world, with a domestic market of 60 million people, access to 500 million European Union consumers and 270 million in North Africa and the Middle East. It is the second-largest manufacturing country in Europe, with extraordinary know-how in strategic sectors such as machinery and automation, fashion and design, the food industry and cuisine. According to the Global Competitiveness Index 2017–2018, presented at the last World Economic Forum, Italy is ranked 43rd out of 137 economies in terms of competitiveness. We should also bear in mind that Italy has many research centres that have consolidated international reputations, and more than 20 Italian universities are ranked among the top 500 in the world in a number of subjects.
Public finances: there’s a widespread perception that the country is in trouble, a belief backed by one of the highest debtto-GDP ratios in Europe (132.6% in 2016). The reforms and the measures introduced by the last three governments, however, are producing interesting results. Following an explicit request by the European Commission, the government has recently implemented a corrective budget on its public finances equal to 0.2% of GDP (€3.4bn), one that has even been approved by the Commission. According to the economic and finance document (DEF), the structural result of this new budget should be a gradual reduction in relation to GDP of both the deficit (from 2.5% in 2016 to 2.1% in 2017 and 1.7% in 2018) and of the public debt (from 132.6% in 2016 to 131.8% in 2017 to 130.9% in 2018). Even though the public debt remains high, it's essential to underline who actually owns that debt: today, only 33% of Italy’s public debt is in foreign hands. In 2001, the figure was 47%. Even the structure of the debt is improving. Italians have not only benefitted from the low ECB interest rates (as the hyper-critics claim). The Ministry of the Economy has also worked on extending the average shelf life of Italy’s public debt securities in recent years – up to 6.76 years in 2016, compared to 6.52 at the end of 2015.
Employment: even on the employment front, there is a persistent perception that the country is in deep trouble. That can’t be denied. But it’s worth recalling that there are signs of gradual improvement. Clearly, now that the government incentives for full-time employees have been stopped, the recovery in employment is mainly boosted by workers on fixed-term contracts. But the fact remains that in 2017, unemployment dropped to 11% (compared to the 13% levels recorded in 2013) and even unemployment among the young has dropped, though it’s still very high, to 32.7%. Still, that is lower than the 40% peaks of the previous years. Finally, according to the latest Istat figures of November 2017, there are 23 million people currently employed in Italy, the highest number since 1977.
Clearly, restricting oneself to mere perceptions (though they shouldn’t be disregarded completely) when trying to understand how a country is doing is not enough to get a clear picture of the political and cultural trends or what a country might need. For that, we need facts backed by figures. By taking a more holistic view, along with a critical, horizontal and functional assessment, we can outline the real state of affairs and develop grounded ideas about what provisions and reforms might be useful.