Well, here are some depressing statistics from Banca D’Italia’s recent release on Italy’s economy.
This does not bode well for Mario Monti. When he arrived on the scene last year, he brought in a package of austerity measures that have helped lower Italy’s borrowing costs on a public debt whose debt to GDP ratio in Europe is exceeded only by Greece. His government has brought in a package of reforms and deregulation that were supposed to improve Italian economic performance and growth. Along with raising the retirement age, there were also tax revenue increases (the VAT was to be increased from 21 to 23 percent). However, economic growth does not seem to be improving. If anything, the package of austerity measures probably further contributed to the economic growth drop while any reforms designed to boost productivity have not yet yielded results. True, a year may not be enough time but unfortunately the statistics are showing a worsening of the situation rather than an improvement.
One interesting aspect of Italy’s fiscal situation compared to Spain, Portugal and Greece is that Italy had a higher total government revenue to GDP ratio going into the financial crisis. (See Figure 2) Indeed, on this particular economic variable, Italy looks a lot more like Germany and the UK looks more like Spain, Greece and Portugal. Italy’s tax effort as measured by the total government revenue to GDP ratio was not weak. The combination of a recession and austerity measures have all come together to further weaken the growth potential of the Italian economy by reducing household economic confidence. (See Figure 3) Italy desperately needs economic growth but seems to be at a loss in putting in place the policies to achieve it. For the average Italian household, their confidence level shows that the economic winter is already here.