• Italy's news in English
 
app_header_v3
Five reasons why the world is worried about the state of Italy
Italy's bank and corporate stocks have had a volatile start to the year. Photo: Giuseppe Cacace/AFP

Five reasons why the world is worried about the state of Italy

Angela Giuffrida · 17 Feb 2016, 10:46

Published: 17 Feb 2016 10:46 GMT+01:00

It's been a bleak start to the year for Italy's economy, despite Prime Minister Matteo Renzi’s rapid reform efforts and a glimmer of hope in the middle of last year.

The only good news has been that consumer confidence reached a record high in January, although business confidence was at its lowest in almost a year.

Some might argue that Italy, often dismissed as a basket case, has always been listless and that a crash is a foregone conclusion.

When the country somewhat blindly joined the euro in 1999, the cost of living almost doubled overnight, as salaries stagnated.

But back then there were at least more jobs and bank credit was easier to come by.

The global financial meltdown of 2008 changed all of that, with Italy's economy limping along ever since. In fact, the size of the Italian economy is roughly where it was over a decade ago.

Bankrupt Greece might have stolen the limelight over the past few years, but Italy, Europe’s third-largest economy and the world’s eighth largest, has been closely watched.

And even more so now as the country teeters on the edge of a banking crisis and concern mounts that it could now go the way of its southern European neighbour.

And if Italy goes the way of Greece, the impact will be monumental, not just for Europe, but the entire world economy.

Here are five reasons why Italy is making the world jittery.

1. Banking crisis - depositors starting to pull their money out

Photo: Fabio Muzzi/AFP

Banks across Europe aren’t in healthy state right now, but in Italy, the situation is far worse.

The number of “bad loans” - that is the number of loans that are not being paid back as per the agreement between the borrower and lender - held by Italian banks amounted to €200 billion at the end of December.

That figure that has been growing since 2008 and now amounts to a huge 17 percent of GDP.

Italy’s major banks and corporations are starting to feel the pain, with stocks in Monte dei Paschi di Siena, Banca Carige, Unicredit and Fiat falling dramatically in mid-January.

The problem is, because of new EU rules, Italy can’t bail-out its banks, while an attempt to create a “bad bank” last year to relieve the Italian banking system of some of these toxic loans flouted state-aid rules.

This is why Renzi’s patience with the EU over the past few weeks has waned - he is constrained by EU regulations to fix the problem, but the EU, with its stringent austerity policy, won’t fix it either.

But what does this mean for you?

Firstly, it means that the more bad loans a bank has on its books, the less they have to lend to you and, crucially, to businesses that want to grow.

People are also starting to wonder how safe their money is in Italian banks.

Fabrizio Viola, the CEO of Monte dei Paschi, Italy’s third-biggest bank and the most troubled one, admitted in January that some customers had started to pull their savings out of the bank.

Although Renzi moved to reassure people that the country’s banking system is robust, the market volatility no doubt spooked depositors - especially with the suicide of an Italian pensioner, who lost his entire savings as a result of the “bail-in” of the four smaller banks in December - still fresh in their minds.

That said, some moves have been made to soothe the jitters.

Italy has managed to strike a deal with the European Commission to help its banks sell their non-performing loans. Although analysts have warned that the deal wouldn’t fully solve the problem, it will reduce potential losses.

The other positive news, according to analysts at Fitch ratings agency, is that Italian banks, despite the huge amount of bad loans on their books, appear to have “adequate solvency”, at least enough to avert total collapse.  

2. The two trillion euro question

Matteo Renzi. Photo: Tiziana Fabi/AFP

Italy is drowning in public debt. The figure stood at almost €2.2 trillion at the end of December - €38 billion higher than at the end of 2014.

That’s the second highest in the EU, after Greece.

So unless Renzi wins more concessions from the EU, he will struggle to reduce that debt pile over the next year.

Here’s why: Italy’s recovery from recession has virtually stalled, and growth forecasts of 1.6 percent for this year are beginning to look unachievable.

Italy also just doesn’t get enough back in tax revenues - even though tax rates are among Europe's highest - to help alleviate the debt.

And the EU simply doesn’t have the money to rescue Italy in the way it did Greece. 

3. Lack of productivity

Photo: Dan Strange

Italy has a dismal record when it comes to productivity - that means the amount of value a worker creates over time; a crucial element of a thriving economy.

Italian workers might be pulling longer days, but they’ve been producing less for over a decade.

This wasn’t always the case. Back in the 1970s, Italy thrived when it came to production.

But that growth dwindled thanks to low investment, a low-quality workforce and lousy governance in the decades that followed.

It doesn’t help that the labour market is still so highly regulated and the country still so heavily unionized.

The cumbersome and costly bureaucracy also prevents producers from actually producing.

The extent of Italy’s dismal productivity came to the fore more recently through the embarrassing exposés on the hundreds of public sector staff who’ve been shirking work to indulge in more appealing pursuits. All the while being paid.

Meanwhile, industrial production fell in November and December and manufacturing output eased in January.

Italy is also a country made up mostly of family-run, small or medium-sized businesses, which lack the funding to help them grow and make them more competitive. 

4. High unemployment

Story continues below…

Photo: AFP

The abysmal rate of production has resulted in high unemployment, especially among Italy’s youth - i.e., the segment that is meant to be propping up the pension payments for Italy’s ageing population.

Leaders may have patted themselves on the backs when the jobless rate fell steadily over a four month period towards the end of last year, but it crept up again to 11.4 percent in December.

Youth unemployment might have fallen during the same month - most likely due to young people fleeing the country for work rather than jobs being created - but it was still at a very high 37.9 percent.

The situation is more acute in Italy’s southern regions, where the economy is even worse than that of Greece’s.

The south's gross domestic product declined for the seventh year in a row in 2014, while its economic output grew by just 13 percent between 2001 and 2014.

Such figures paint a picture of an ever-widening wealth gap between Italy's north and south, with one in three people at risk of poverty in the south, compared to one in 10 in the north.

A dwindling population is also hindering chances of a southern revival: in 2014, just 174,000 births were registered in the south - the lowest in 150 years. 

Meanwhile, young people are fleeing in their droves, sick at the slow pace of change and lack of opportunities, something which threatens to turn many small southern Italian cities into ghost-towns.

5 - A shrinking population

Photo: Caspar Diederik

Regulation, a shortage of jobs and an ageing population all play into the hands of Italy’s main economic killer: weak production.

Italy’s birth rate has more than halved since the ‘baby boom’ of the 1960s, with the number of babies now being born averaging about 500,000 a year. 

A lack of jobs and money is preventing young people from leaving home and starting a family, while little has been done by the government to encourage people to have children.

Italians are also living longer, thus depending more on pensions, but with no jobs for the young people whose taxes are expected to fund them.

For more news from Italy, join us on Facebook and Twitter.

Angela Giuffrida (angela.giuffrida@thelocal.com)

Your comments about this article

Today's headlines
Plane of US WW2 pilot finally found near Bologna
The P-47 Thunderbolt in action. Photo: Wikimedia Commons

The final resting place of an American Second World War fighter pilot has been found by Italian amateur archaeologists near Bologna.

Only a quarter of Italian towns host refugees: study
Just 2,026 of the country's 8,000 municipalities currently host migrants on humanitarian grounds. Photo: Gabriel Buoys/AFP

In spite of Italy's position on the front line of the Mediterranean refugee crisis, just one in four of Italy's municipalities has housed refugees and asylum seekers.

Turin could slash Wi-Fi over 'radiation' concerns
Turin hopes to reduce potentially harmful radiation from wireless modems. Photo: Scott Beale/Maelic/Flickr

Turin is planning to cut back on Wi-Fi in state schools and government buildings over concerns that radiation might damage people's health.

Italy could make it legal to grow your own weed
Italy's parliament will begin debating new cannabis laws on Monday. Photo: Robyn Beck/AFP

Italy could legalise home-grown cannabis, if a law being debated on Monday gets the green light.

Italy has 'no banking problem': finance minister
"All the countries should relax: there is no Italian banking problem," Padoan said. Photo: AFP

Italy does not have a problem with its banks, finance minister Pier Carlo Padoan said Sunday, despite investors fretting about nearly $400 billion of bad debts weighing down the sector.

Pope Francis visits Poland amid security concerns
"Refugees? The pope will say something on that," Archbishop Celestino Migliore, the Vatican ambassador to Poland said. Photo: AFP

Pope Francis lands in Poland on Wednesday amid heavy security for an international Catholic youth festival where he is expected to make the case for welcoming refugees, a thorny issue for Warsaw.

Italy hosts first Down's Syndrome 'Olympics'
The athletes taking part are dubbed T21s, named after the most common form of Down's Syndrome, trisomy 21. Photo: AFP

The roar from the stands in Florence could not have been louder if it had been stars Usain Bolt or Shelly-Ann Fraser-Pryce on the track.

Why Milan could be Europe's post-Brexit financial hub
Milan is vying to be Europe's post-Brexit financial and business hub. Photo: Melanie Bowman

Milan has also joined the race among European cities to pick up the post-Brexit spoils should London’s financial institutions choose to shift their operations elsewhere. But is it a viable contender?

Ekberg wannabe says Trevi dip was a 'homage to Rome'
Delilah Jay just before she waded into Rome's Trevi Fountain on Tuesday. Photo courtesy of Delilah Jay

“I love Rome, I love Fellini and I love Ekberg – I’ve had so many comments on my Facebook page saying I look very much like her.”

Venice to build new bridge in memory of Bataclan victim
28-year-old student Valeria Solesin was the only Italian victim of the Paris terrorist attacks. Photo: Pierre Teyssot / AFP

Venice, the so-called 'city of bridges', is set to build one more, in honour of the only Italian victim of last November's Paris terrorist attacks.

Sponsored Article
Avoid hidden fees when sending money overseas
Travel
Five crowd-free alternatives to Italy's tourist hotspots
Sponsored Article
Why Swiss hospitality graduates are in demand
National
Italian hotspots struggling with 'too many tourists'
Culture
Meet the Italian chef behind the world's best restaurant
Travel
Escape the heat at one of these beautiful Italian lakes
Sponsored Article
Why expats choose international health insurance
Politics
Why the UK is now officially crazier than Italy
Culture
How you can stay cool like an ancient Roman
Lifestyle
Food for thought: fight on to save Med diet from extinction
Sponsored Article
Why you should attend an international job fair
National
From asylum seeker in Italy to organic yoghurt entrepreneur
Sponsored Article
Why Swiss hospitality graduates are in demand
National
Fifteen maps that tell the story of Italy
National
Why Italy might be the next big threat to the EU's future
Sponsored Article
Five things Americans should know about voting abroad
Politics
Post Brexit, less than a third of Italians want to leave EU
Politics
The bright side of Brexit: the 'good news' for Brits in Italy
Culture
Eight wonderful things to do in Italy in July
Sponsored Article
Avoid hidden fees when sending money overseas
Travel
Six of the best places to visit within easy reach of Rome
British business owners in Italy feel Brexit jitters
National
How to get Italian citizenship (or at least stay forever)
Sponsored Article
Why expats choose international health insurance
Politics
Where does Britain's exit from the EU leave Italy?
Sponsored Article
Why you should attend an international job fair
Politics
Has the time come for Italy’s Five Star Movement to shine?
Society
Why Italy must change after young woman’s brutal murder
Politics
Is Italy's Five Star up to the challenge of running Rome?
Culture
Six of the most bizarre Italian foods everyone should try
2,559
jobs available