The Italian economy expanded by an estimated 0.8% in the final quarter of last year, indicating that the annual growth rate had doubled to 2.8% from 1.4% in 1999 – the fastest rate since 1995. Even so, it was the weakest performance of any economy in the euro zone and well below the expected 3.4% average for the whole area in 2000.
Prime minister Giuliano Amato has blamed the fourth quarter weakness partly on severe flooding in the northern part of country. This caused factory closures and sent industrial production down by 0.8% in October, following a month of zero growth. Consumer spending was also held back by the flooding and by inflation, driven by rising oil prices, which restrained real income growth.
Consumer prices are estimated to be increasing at an annual rate of 3% – the highest since October 1996, and further back in the price pipeline manufacturers’ factory gate prices were up by over 6% in December 2000.
For each of the past five years Italy has had the lowest growth rate in the euro zone, growing by an average 1.7% since 1995, compared with 2.5% for the whole of the area. The gap appears to have been closing as the country recovered from adjustments necessary for entry into the single currency.
Domestic demand
The expansion which began in late 1999 continued during the first half of 2000, underpinned by domestic demand – notably for capital equipment – and by buoyant exports which were supported by the weakness of the euro and strong sales in the US and Asia. However, the pattern of activity changed: export growth weakened, imports soared and growth slowed. The latest figures reveal that while total exports rose by 17% in the year to November 2000, imports surged by 25%.
For 2001 most economists expect that real GDP growth will remain below the euro zone average and may be as low as 2.3%. This will be despite planned cuts of 28 trillion lire (US$13.3bn) in personal and business taxes. The government plans to replace the lost revenue by fighting tax evasion, but the 2001 budget almost certainly means that Italy will be the most indebted country in the euro zone, with public debt likely to pass the 2000 deficit rate of 1.3% of GDP.
Italy is the fourth largest economy in western Europe in terms of population and total domestic output, after Germany, the UK and France, but it comes only 12th in the EU in terms of GDP per head, ahead of Spain, Portugal and Greece.
Incomes are much higher in the industrialised north of Italy than in the south. In the north the unemployment rate is about 4.5% and skill shortages are already a concern. But the unemployment gap between the northern and southern regions is still 16.25% according to OECD estimates. Overall the jobless rate of 10% is one of the highest in the euro zone.
Nonetheless the ruling centre-left government has some notable achievements to its credit, the biggest being the reduction of the budget deficit and, although there are some doubts over its ability to meet its target this year, a balanced budget in the medium term appears a strong possibility.
Secondly, labour market reform has included the introduction of short-term labour contracts which have helped reduce unemployment. Other reforms have started to free up the notoriously inefficient public administration and some efforts have been made to overhaul the tax system. However, the cumbersome legal system awaits simplification.
But James Blitz, writing recently in the Financial Times, argues: ‘The overwhelming concern remains the declining [international] competitiveness of Italian industry’ and says this is largely due to Italy’s increasing reliance on small companies as the engine of growth, although they lack the scale and resources to compete in the increasingly global market.
General election
Now there is only a couple of months to go before the general election: Silvo Berlusconi, media-to-football tycoon and right-wing leader of the present opposition, is tipped by most polls to win by a wide margin from the young liberal candidate Francesco Rutelli, who has been mayor of Rome since 1993 and will head the centre-left coalition.
So what are the prospects that the new government will be able to lessen the structural rigidities under which Italian companies operate? One issue likely to dominate is reform of the state pension system. Liabilities are unsustainable over the longer term and impose a heavy tax burden on employers, which a gradual lifting of the retirement age from 57 to 65 would reduce.
Besides pushing for tax reform, a winning right will give priority to devolution, for which the north has become increasingly restless. The present government has successfully blocked the implementation of plans by both Veneto and Lombardy for a degree of federalism. A winning left may try something bold in the labour market, and state-owned companies worth 300 trillion lire (US$135bn) have still to be privatised, while those that have been partly privatised remain under state control.
The electoral system, which allows dozens of parties into parliament and leaves the elected government open to instability, remains in need of reform: in the past four years there have been five governments and three prime ministers. An amendment to the constitution to make it less easy to bring down a government without an alternative being at hand, and so make the smaller parties more responsible, has yet to be implemented.
If Berlusconi becomes prime minister he will attempt at least some of the much-needed reforms but the fear is that his caution and the system will together ensure that the status quo will prevail.
