Our Opinion: 2014

Italian woes

Italy is back in recession, with the economy shrinking in both the first quarters in 2014. This is Italy’s third recession since 2011 and the Economist said last week it “will have a profoundly demoralizing effect on a nation that thought the worst was over.”

Italy’s problems are not all recent, of course. Its economy has barely grown for 20 years and is currently the same size that it was 14 years ago. Without growth, it will simply be unable to reduce its massive debt – currently 133% of GDP – and will go bust.

To get out of this situation, it needs to reform structurally and have more discipline in the way it spends its money. In particular, Government waste must be reduced and tax on labour need cutting, along with red tape, to encourage companies to hire.

Italy’s current Government is the 65th in 65 years. The Prime Minister, Meatteo Renzi, hoped the economy would recover whilst he focused on political reform. But, for now, things are getting more – not less – complicated.

The Government budget assumed growth in 2014. That now looks impossible. More spending cuts are inevitable if the Government wants to meet its Eurozone deficit commitments, without spectacular tax rises. However, spending cuts now (without economic reform) may reinforce the downward spiral.

It won’t be long before fears over Italy’s solvency returns to the markets.