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Italy Is Not an Economic Basket Case

At a time when Europe’s future, and even its financial present, has been called into question, the fact that the picture is in some ways gloomy does not mean that the malady is irreversible. Despite its very real problems, Italy is a case in point. In fact, the country is moving toward recovery.

Undeniably, Italy is plagued with government corruption and, given the stagnation of its population growth, an aging of the population. Back in 2009, at the height of this financial crisis, GDP in Italy had fallen by an incredible 6.8 percent. During the same period, other major economic indicators were terrible.

Yet today, the situation looks far better. According to Confindustria, there is a set of positive elements to take into consideration when it comes to the future of Italians. First and foremost: Italy’s GDP has been growing at a 0.30 percent rate during the last two years or so. It is more or less the same growth rate that Italy has experienced since 1981.

This is not surprising because, according to the World Bank, Italy is still a “high income” country. In Europe, it is the fourth largest in population with almost 61 million and, with a GDP of $2.11 trillion, it is the fourth-largest economy on the continent. With regards to GDP, Italy is considered the eighth richest country in the world (Brazil, with a population of roughly 200 hundred million, is the seventh).

Life expectancy at birth is 81 years: Italians live longer than Americans (78.9). GDP per capita in Italy is $35,084: higher than Spain, lower than France. At purchasing  power parity, we are the 29th country in the world in terms of GDP per capita.

According to the last Confindustria survey on the state of Italian economy, exports have been rising by 6.7% and 5.1% respectively in 2010 and 2011; this would be thanks to the intensification of world trade (+17% since March 2010). Exports have always been our best bet: our politicians found out by the 1980s that devaluing the lira actually meant boosting foreign trade.

All and all, according to Confindustria, when you take into consideration the Italian economic situation as a whole, “the fear of markets appears to be exaggerated.” Consumption will most probably continue to grow in Italy (even though at a sluggish pace: +0.4% / 0.7%) during the next two or three quarters (this trend being in line with shaky labor market conditions and family income).

However, occupation levels will probably start rising again only by the end of 2011, although, this is only natural. Instead, inflation in Italy will practically follow the course of consumer price indexes in the rest of Europe: it was 1.74% in October 2010, it is at 3.0% now.

But looking at the historic CPI index for Italy will reveal that inflation here has always been caused by negative exogenous factors (i.e., 1973, 1991). In theory, even the infamous Italian deficit (which now amounts approximately to 5.1% of its GDP) will eventually shrink, thanks to the new economic reforms that were recently introduced, to at least one percentage point during the next year.

Unfortunately, though, at the same time public debt will continue to go up and it will reach 118.9% of Italy’s GDP by the end of 2011. It is a very high value, according to every standard, but do not forget that Europe as a whole has 80% of public debt, France has 81%, Germany 82% and the UK 80%. The problem is that, according to the stabilization pact that Italy has reached with the EU, our country is supposed to produce four more additional GDP points in five years (by the end of 2016). Once again: our neighbors share exactly the same problem.

The economists at Confindustria believe that, even though stability and austerity are an extremely important asset for Italy, without growth there cannot be any development. Moreover, there is a risk of being caught in the “Paradox of Savings" if we continue towards this austerity path (in times of economic downturn, if everyone tries to save more money than usual, then the aggregate demand will logically go down, bringing the whole economy with it.).

That is why growth is the keyword for any economic plan. Italy must vigorously pursue the amelioration of her manufacturing sector. Italian industry is, today, more internationalized than ever and more focused on emerging markets than ever (Asia, Latin America). Finally, today, Italians produce  more high-technology goods and employ more graduated people than ever before. If Italians could only find a way to produce more stable governments from now on, perhaps their future would not look as bad as many depict it. However, one thing remains certain: the predictions of Italy's downfall are greatly exaggerated.