Group 1: Italy
Future Prospects Paper
Since the beginning of the Eurozone crisis, the main focus was concentrated on Greek problems; however, Italy, the third largest economy in the Eurozone, has major problems that are backed up by rather disturbing macroeconomic indicators. Since 2011, when Italy almost went bankrupt due to rampant interest rates, it still has not managed to get out of its record-long depression. The government has resorted to limiting spending cuts, increase taxation and borrow more to solve the problem, but this does not resolve three main issues that include lack of competitiveness, excessive budget deficits and insufficient bank control.
The major problem that significantly impedes recovery of Italian economy is huge public debt burden. The public debt currently accounts for 127 percent of GDP. The sheer size of the debt rules out the possibility of bailout of any sort in the future, which forces Italy to refinance its debt. Sixty percent of Italian debt is held domestically, which is rather hopeful, as it encourages domestic investors; nevertheless, still over 800 billion Euros or Italian debt is held by foreigners. Though Germany and France are the two largest foreign holders of Italian debt, China bought Italian bonds to help bail the country out, to little avail.
In October, the government approved a 2014 budget plan containing tax and spending cuts. It aims at stimulating the recession and keeping the budget deficit inside the European Union’s 3 percent of output limit. Introduction of tax cuts for workers and companies, hopes to stimulate entrepreneurship and investment. Record-low savings and scarce bank liquidity shades doubt over the domestic debt absorption capabilities. Furthermore, it appears that these steps may not be enough to control the debt. EU Economy Commissioner Olli Rehn scolded Italy for insufficient speed in public debt reduction. He announced that Italy will be excluded from the flexibility clause regarding investment.
Another primary problem that Italy has to address is stagnant labor productivity and competitiveness. It seems that Italy is the country that made the least effort in the Euro Zone to correct that particular problem, as so far there were no reforms addressing this issue. The Italian labor market is currently very rigid, predominantly due to high bargaining power of labor unions and interest groups. Current competitiveness is constantly falling, as the wages increase at a much higher pace than labor productivity. On average, wages grew at the rate of 2.5 percent per year in the private sector, even more in public one, with almost no growth in the productivity. Moreover, increasing labor costs discourage the employers from employing new workers that is clearly reflected in unemployment rates. There are three options to restore competitiveness. First, induce domestic devaluation of prices (slashing domestic prices). Second, induce intra-euro...