Does Italy deserve its place on the periphery?
Italy is a functional economy with problems, rather than a dysfunctional economic problem, says Kevin Lilley, manager of the Old Mutual European Equity fund.
Italy is different. It stands among the original G7 economies, a large, developed, industrial market. Its economy is larger than Canada, eight times the size of Greece and 10 times the size of Ireland or Portugal. It has a history of innovative manufacturing as deep and successful as any in continental Europe.
The good Italy
In Ferrari and Lamborghini, Italy can probably claim to make the most highly engineered cars anywhere in the world. In Fiat, it has managed to sustain a volume car producer, one which is exposed to the revival of US automotives through its involvement with Chrysler. Italy’s textile and fashion brands are among the strongest in the world and appear to have a knack of happily ignoring the paradox of selling luxury goods to a global mass market. Milan fashion week ranks only with Paris in prestige.
Politically, Italy is more stable now than it has been at any time in the last 50 years. Mario Monti was appointed prime minister in November last year to lead a technocratic government. Monti has significant political and administrative experience, having been commissioner first for the Internal Market and then for Competition, one of the most powerful positions in the European Union.
Monti’s leadership has been accepted, while similar governments imposed on Spain and Greece had to go to the polls and were replaced by mainstream politicians. His package of austerity measures, including increased taxes and pension reform, swept through both houses of parliament. He has since introduced labour market reforms, inevitably to some resistance.
Italy is a nation of savers. Its year by year fiscal balance is second only to Germany among the G7 states. It is one of only three states in the eurozone – alongside Finland and Germany – to maintain a primary fiscal surplus. Its net public deficit in 2011 was 3.9%. This compares to 8.5% in Spain, 9.2% in Greece and 9.9% in Ireland – or 9.6% and 8.7%, respectively, in the US and UK.
That is the good Italy, the functional Italy. It is the Italy which is a step apart from the other eurozone peripheral economies, the Italy which in many respects is comparable and even superior to its G7 counterparts. But there is another Italy – the bad Italy – which earns its place on the periphery.
The bad Italy
Italy’s deficit is manageable, but its debt is not. Italian public sector debt is high and has been high for years. At 100% of GDP, it is second only to Japan and Greece in the 37 countries counted by the IMF as the developed world.