Italy: a torn country between economic instability and political uncertainty

Posted on the 26th October 2016 by Orsola Maria


"Growth estimates are down after the Brexit" said Italian Prime Minister Matteo Renzi at RTL radio show.

After the decision of the UK’s citizens to depart from the EU, Euroscepticism and uncertainty are spreading across European countries, posing severe challenges to their future economic and political outlooks. Under this scenario, Italy seems to suffer the most due to the stagnating economic and fragile political situations.

Italy has the third largest economy in the Eurozone, although the anachronistic banking system and low productivity of the country impede the full recovery from the 2008 financial crisis.

For what concerns the banks, the slow bankruptcy legislation resulted into the bail-out of Monte dei Paschi di Siena, the third largest bank in the country, as well as of some other financial institutions. Although the Italian Prime Minister M. Renzi redesigned the bankruptcy policy, its late enforcement and the long and burdensome bureaucratic processes delayed the implementation of an effective security plan.

As a consequence, some of the major Italian banks, such as Unicredit, Intesa Sanpaolo, and UBI banca, pooled their financial resources together for the creation of a private financial fund named Atlas in April 2016. Such move is supposed to support the re-capitalization of the banks’ funds through the investment of about 4bn dollars. However, analysts argue this injection may not be sufficient to cover the debt. What they offer instead, is a radical revision of the balance sheet which would distinguish between profitable and unfruitful assets.

This critical financial situation contributes to low consumer confidence, hindering Italy’s economic recovery. The performance of the country over the past two quarters has been flat and the IMF lowered the growth expectations by 0.1% for the next year.

Given the skyrocketing debt of the government, the heavy-taxing environment negatively affects both households and producers. On one side, high income taxes encourage consumer to save more. On the other hand, unfavourable fiscal conditions discourage FDI and preclude the expansion of the existing businesses in the country.

Provided the difficult economic framework, the current political uncertainty may additionally delay the recovery. The referendum on the potential amendment of the national constitution, which will take place in December this year, represents the apex of Renzi’s government, marking either the national approval of his political agenda or the dismissal of his mandate.

Economic recovery in Italy is likely to take more time than expected. Even if the restructuration of the financial system and the restoration of consumer confidence are to be effective, a trustworthy political government is paramount to the steady and stable change.

Written by Orsola Robasto



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