March 24, 2010Italy Economyby EW World Economy Team

Italy Economy

Italy is the fourth largest economy in Europe and the eighth largest by nominal GDP in the world. The Southern European nation is the tenth largest exporter in the world, exporting a total of $474 billion worth of goods in 2013. According to the Human Development Index and The Economist, Italy has the eighth highest quality of life in the world. It has the third-largest gold reserve and is the third largest contributor to the budget of the European Union.

Despite an innovative industrial and agricultural sector, the country's economy has largely stagnated since the 1990s. Government programs attempting to stimulate economic growth led to large public debts. This combined with a slow legal system, high taxes, and unusually strong labor laws led to a rating of 80th in the Index of Economic Freedom for 2015.

Italy is a founding member of the European Union, the Eurozone, the Organization for Economic Co-operation and Development (OECD), the G7, and the G8.

Economic History

After the fall of Rome, Italy splintered into a number of smaller principalities. Feudal economies were the common model at this time, and each relied heavily on agriculture. The nation would not unify until the late 19th century.

Thus, between 1861 and 1870, Italy's feudal land system ended and the nation unified. Unfortunately, unification did not lead to the widespread redistribution of wealth that many anticipated. Italian industrialization was largely artisanal in nature and occurred around political capitols. Factories tended to cluster in the northwest near water bodies used both for the machinery and for shipping.

When modernization accelerated in the 1880s, textiles and shipbuilding became early growth industries for Italy. However, industrialization settled differently in the north than in the central and southern parts of the nation. This led to what was later known as the Italian diaspora, in which nearly 26 million Italians immigrated between 1880 and 1914 in search of better economic opportunities.

When the First World War occurred, Italy swelled its army, and incurred an enormous budget deficit. After the conclusion of the war, Italy found itself deeply in debt with large reconstruction projects necessary to restore previous levels of production.

This left a vacuum into which the National Fascist Party led by Benito Mussolini came to power in 1922. During the first years of the Mussolini's regime, the Fascist government pursued a laissez-faire economic policy, initially reducing taxes, easing government regulations, and removing trade restrictions, either in whole or in part. However, these policies were soon abandoned in favor of greater control.

When the Great Depression struck, Italy was particularly hard hit. In response, the government nationalized the holdings of banks with significant industrial securities, giving the fascists control of the nation's means of production. This led to an economic model based on a partnership between government and business that soon extended to politics in what came to be known as corporatism.

At the same time, Mussolini increased military expenditures, further stimulating economic and industrial growth. Most of these industries were also under government control, so by 1939, Italy had the highest percentage of state-owned companies after the Soviet Union.

Following World War II, Italy's economy collapsed. Italian per capita income reached the lowest point at the close of the war. The economy could only move in one direction, and it did so in what would later be dubbed the "Italian postwar miracle."

Italy, a hinge nation in the Cold War, received enormous support from democratic nations like the United States and the United Kingdom. While the end of aid might have spelled disaster, the timeline coincidentally overlapped with American involvement in the Korean War, resulting in a high demand for Italian metal and manufactured products.

This situation was quite favorable for Italy until social unrest in 1969 and 1970, combined with the oil crisis in 1973, put an end to Italy's boom. Following the war, economic growth occurred at a rate of between five and six percent until 1973. Unfortunately, the 1970s saw a long period of economic hardship for Italy. A budget deficit became permanent and intractable, averaging about 10 percent of the GDP each year while the national currency continued to lose value.

The recession continued through the mid-1980s, when a set of reforms freed the Bank of Italy and drastically reduced inflation. This led to a second economic miracle, based largely on exports and the production output of small and medium-sized businesses producing clothing, leather products, shoes, furniture, textiles, jewelry, and machine tools.

However, this boom was unsustainable. Thus, in the 1990s, efforts to curb public debt led to restrictive economic policies that put the brakes on the economy. A global recession further worsened the slowdown. Despite a brief recovery period during the late 1990s, the Italian economy remained largely stagnant between 2000 and 2008.

Current Economic Situation

Italy suffered a significant blow to its economy when the great recession settled in around 2009. The national economy shrunk by 6.76 percent during seven quarters of recession. According to Eurostat, Italian government debt in 2015 reached 128 percent of GDP, ranking as the second largest debt ratio after Greece, 175 percent. However, most of this public debt is owned by Italians. That fact, coupled with relatively high levels of private savings and low levels of private indebtedness have given many financial professionals reason to declare Italy one of the safest for investment among Europe's struggling economies.

Huge regional disparities persist between northern and southern Italy. The government remains plagued by political corruption, pervading organized crime, and very high unemployment rates. One survey in 2007 concluded that about 80 percent of the businesses in Catania and Palermo continue to pay protection money to the mafia. While the mafia is slowly losing ground in Italy, the Italian Ministry of Interior reported that organized crime still generated an estimated annual profit of €13 billion.

Economic Forecast

According to the OECD, after contracting for most of 2014, Italy should return to a modest level of growth in 2015 and accelerate leading into 2016. Policy changes should open bank lending and investment. Unemployment should begin to decline in 2016, but it will still be relatively high, while wages do not look to improve significantly. The very high public debt ratio is somewhat concerning, but growth should reach about 0.5 percent by the end of 2015 and climb to 1.1 percent in 2016.

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