IN THE streets of Formigine, Italy, the mass closing of industries and factories has rendered numerous workers jobless. Both citizens and business owners are left confounded as the choice is not in their hands. This is only one of the various nationwide hardships that the state is facing nowadays due to a severe recession. A major actor within global markets, Italy has plummeted into an economic and political crisis starting from the second half of 2018. Employment rates have reached 11.7%, national growth rates are under 1%, and the people elected a populist coalition government in the midst of the crisis. Italy’s economic status quo is causing deep anxiety within the eurozone* as well as the EU leadership. The implications of the Italian economy’s recession could prove to be a harbinger of the EU’s financial strife.
Italy’s economy: stricken with lethargy
With Greece finally escaping its infamous economic crisis that spanned over two decades as of 2018, Italy is seen as the next epicenter for a eurozone crisis. Analysts claim that given the nation’s considerable economic size, the severe recession could proliferate its monetary crisis internationally**. Amid an already lethargic eurozone, Rome’s economy plunged into recession last year with the economy shrinking by 0.2%, following a 0.1% decline since October 2018***. This is the third time Italy has slipped into a recession, with the fact that Italy is already severely in debt as a contributing factor. Currently, Italy’s debt stock exceeds approximately 130% of its GDP, in both domestic and overseas financial obligations.
The causes for the crisis stem from a number of factors. For starters, Italy’s fervent advocacy for an anti-competitive economy in the past has proven to be detrimental in the long run. Through imposing a substantial amount of taxes to big conglomerates and preferring medium-sized enterprises, the national competitiveness of Italian businesses eventually stagnated. According to Silvia Ardagna of Goldman Sachs, the shortcomings of the 1980s Italian industries lied in “not investing in R&D and lacking the management capabilities and human capital to allow them to compete on a global scale”****. In addition, poor labor productivity, an education system of low efficiency, high public and foreign debt, and issues with civil justice also contribute to Italy’s economic shortcomings.
Finally, the hiccups the coalition government has displayed over policy making are further proving problematic for the nation. Currently, Rome’s government is comprised of a coalition of two political factions: the Five-Star Movement (M5S) representing the left-wing movement fervently supporting welfare policies, and the right-wing Nega-Lord group advocating for a conservative economy. This form of government was created in June 2018, when the two parties came together in parliament after neither had reached a majority in the election. This new government was imbued mainly with the idea that Italy, not the EU, should be deciding its own policies. With the currently right-wing faction taking control and pledging to revitalize Italy’s low GDP growth, Rome clashes heavily with the EU policies that regulate its budget plans. The EU leadership mandates its member states to not exceed 3% of their GDP in planning their national budget. However, many Italian citizens argue this regulation hinders national growth. The government’s populist policies, as well as its anti-eurozone outlooks, drove Rome to draft budget plans that neglected EU restrictions. As a result, Italy has been threatened with sanctions that have exacerbated the issue further. However, through negotiations that took place in December 2018, the coalition eventually gave in to the EU’s regulations and kept its deficit target to 2.04% of its GDP.
Rome’s solutions to the recession
With the pedigree of deficit issues that Italy has, one thing is clear: it will not be able to withstand another recession after the current national debacle. With the banking system weak from weathering the economic crisis and increasing debts, foreign investors have cast scrutiny and some of them have pulled their assets from Italy*****. Thus, the Italian government’s main objective is to provide a solution that does not just prolong the inevitable.
In an interview with Roman press Il Messaggero, Italian Secretary of the Council of Ministers Giancarlo Giorgetti stated, “With foreign investors minimizing their assets in Italian capital, the only way to avert another catastrophe would be for the Italian economy to regain the trust of investors once again”. Appropriately, Rome’s future policies include increasing interest rates for loans in order to garner more capital for government finance. Decreasing the value of currency within domestic territories is always a staple for politicians dealing with an economic crisis, but this option is discouraged due to the single currency policy within the EU.
While the Italian government hopes it can rely on the European Central Bank (ECB) to intervene in the case of Italy facing a serious collapse, the volatile situation in Italy has made ECB leaders hesitant to involve themselves within the state******. On the opposite of the spectrum, some politicians in Rome discuss the radical solution of breaking apart from the EU. However, with the issues Brexit is currently facing and the question of whether Italy could manage its finance independently, even domestic citizens are casting doubt about this direction.
Trends for the rest of the eurozone
With everything that has transpired within Italy for the last six months, the big question is whether this will be a reoccurring phenomenon throughout the Eurozone. The pedigree of the EU instability roughly began with the globalization of finance coupled with the 2008 Great Recession and sub-mortgage crisis, striking first with the Greek economic recession. Discounting the massive concerns over Italy’s economic size and governmental situations, budget crisis in the EU is not a unique phenomenon. Portugal, Cyprus, Spain, and Ireland are some examples of eurozone countries struck with common issues. In fact, EU stipulations on spending and debt have received criticisms in the past, regarding its neglect for the diverse situations individual states face. The restriction of the Euro currency has ultimately limited domestic economy control and created long-term challenges for the eurozone.
Italy is a major symbol for other populist states that have criticized the policy of single euro currency. The Italian Deputy Prime Minister went so far as to state their budget increase and independent policies should be a staple for EU members. However, Italy’s failure to completely assert themselves in budget negotiations with the EU leadership has led other members to conversely cast doubt on Italy. As of 2019, most Eurozone members are faced with a tradeoff: either risk cutting away from the EU and facing temporary collapse, or stay within the union and continue being restricted by its policies.
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In the context of Brexit and instability throughout the European Union, Italy’s financial instability should not be taken lightly. As the 8th largest GDP in the world, Italy’s economic crisis could incite more detrimental ripples in the international economy, spilling out of even the eurozone. With deep-rooted multiple causes contributing to the Italian status quo over a prolonged period, averting such crisis will be no easy task for the nation as well as for the EU.
*Eurozone: European Union nations that use the euro (€) as their currency
*****CIA World Factbook
******Financial News London