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News : EU Economy Last Updated: July 16, 2015 - 7:50 AM


Italy posts annual budget deficit every year since Second World War
By Michael Hennigan, Finfacts founder and editor
July 14, 2015 - 7:50 AM
 

In its 154 years as a unified country, Italy has had a debt-to-GDP (gross domestic product) ratio below 60% in less than 30 of those years — the 60% ratio is the maximum public debt according to the 1992 Maastricht Treaty (formally, the Treaty on European Union) for members of the single currency system. The new Italian Republic that was declared a year after the end of the Second World War, has posted a budget deficit every year since.

In 1861, the Kingdom of Italy began with a 37% debt-to-GDP ratio which had risen to 100% a decade later and during the Fascist regime the ratio fell to 80% with the help of a privatisation programme. The ratio was at 122% in 1938 and at 39% in 1948 when a constitution for the new Republic was approved — the fall was a byproduct of hyperinflation.

The period 1950-1973 is regarded as a Golden Age for growth in Western Europe as countries recovered after the war years with labour in plentiful supply. Italy grew at an annual average of 5% — the same rate as West Germany. Angus Maddison, Monitoring the World Economy (1995, OECD, Table 3-1).

As growth slowed and inflation surged following two oil price hikes in the 1970s, public spending rose and the rise was mainly paid for by borrowings — public spending as a ratio of GDP jumped from 38% in France in 1965 to 52% 20 years later; in Italy the rate rose from 34% to 51% and in the UK from 36% to 48%.

Greece was star economic performer in 1950-1973; Budget deficits every year since 1974

Strong Italian GDP growth led to a reduction in the ratio of Italian public debt from 31% in 1950 to 27% in 1963.

The annual budget deficit was typically in low single digits — 3.74% in 1951; 1.38% in 1961 and 4.32% in 1966 [here, Page 700].

Economists at the Banca D'Italia in a 2002 paper said:

For about 25 years, from the mid-sixties to the early nineties, Italy ran unsustainable fiscal policies. High deficits, stemming from persistent primary imbalances, fuelled public debt accumulation. In 1994 the debt reached 124% of GDP. Over the same period, future pension liabilities gradually increased to about 400% of GDP. Fiscal policy and rapid population ageing set public finances on an unsustainable path, with large generational imbalances and perspective deficits."

Rising government spending was not matched by revenues and in the 1980s as in Greece, annual Italian deficits rose to double-digit rates — in 1987 Italy had a deficit ratio of 12.6% compared with 2.7% in the UK and France and 1.5% in Germany.

The average Greek deficit was at 16% in 1980/1989 with debt servicing at 8%, resulting in a primary deficit of 8%.

In Italy in 1991 the primary balance (excluding debt servicing) returned to surplus for the first time since the mid-sixties and in the second half of 1992, reform was accelerated by the European exchange rate crisis which forced the lira to leave the exchange rate mechanism.

Annual debt servicing was at a huge 12.5% of GDP. The interest cost fell to 5% of GDP in 1998-2007.

Italy had a 3% budget deficit ratio in 2014 and a primary surplus (excluding interest costs) of 1.8% of GDP. The IMF forecasts a gross debt ratio of 134% in 2015.

Despite the stabilising of debt in the 1990s, the economy stagnated.

Economists at the Banca D'Italia in a 2011 paper speculated as to why Italy had underperformed in modern times:

The experience of the late 1960s...points to a major, Italian problem. Relative to Germany and Japan, administrative ability (by both politicians and the civil service) seems to have been in short supply and this must have affected economic performance, be it because of more pervasive rent-seeking activities, slower judicial procedures, worse infrastructure provisions, etc. Evidence confirming this judgment is not available for the late 1960s, but over the last 30 years indicators have emerged that put Italy into a much less favourable position than the other two countries, be this in the areas of an intrusive regulatory environment, the provision of law and order, the control of corruption, the existence of trust, etc. More recent World Bank investigations for 1996-2009 confirm this. In all but one of the governance indicators that are covered by that institution, Italy is significantly below Germany and Japan. And an even more damning picture is painted by survey evidence on overall infrastructure quality: in recent international comparisons of 125 countries, Germany was ranked 6th, Japan 16th and Italy 73rd (World Economic Forum, various years)."

In his final months as governor of the Banca d'Italia before becoming European Central Bank president, Mario Draghi, commented on Italy 150 years after unification in 1861:

Since the start of the recovery, two summers ago, the Italian economy has recouped only 2 of the 7 percentage points of output lost in the recession. In the first quarter of this year its growth rate was barely positive.

In the course of the past ten years, Italy’s gross domestic product has increased by less than 3%; that of France, with about the same population, by 12%. The gap perfectly reflects the difference in hourly productivity — stationary in Italy, up by 9% in France. Italy’s disappointing result applies to the country as a whole, North and South alike.

If productivity stagnates, our economy cannot grow. The productive economy loses competitiveness; widening deficits appear in the current account of the balance of payments. Foreign direct investment dries up. In the course of a decade, Italy received foreign direct investment inflows equal to 11% of GDP (gross domestic product), compared with 27% in France.

Wage growth is modest in Italy, as it cannot diverge too sharply from productivity growth: this has repercussions on domestic demand. The real earnings of employees in Italy have been virtually stationary over the past decade, compared with a gain of 9% in France; real household consumption, which has risen by 18% in France, has grown by less than 5% in Italy and only by eroding the propensity to save.

Productivity in Italy is stagnating because the system has not yet adapted sufficiently to the new technologies, or to globalization. Understanding the reasons for this has been the aim of much of the research conducted by the Banca d'Italia in recent years.

The problem of the inefficiency of civil justice has to be tackled at the root. Ordinary lower court cases are now estimated to last more than 1,200 days, putting Italy in the World Bank rankings for ease of doing business at 158 of 183 countries worldwide for enforcing contracts and an 87th rank overall.

The disparities within Italy remain unacceptably wide, between North and South and between different schools within the same area, even at the level of compulsory education. At the university level, more competition between institutions is desirable in order to establish centres of excellence that can compete in the world arena. The number of university graduates is still low by international standards. According to OECD (Organisation for Economic Cooperation and Development) estimates, the gap between the Italian education system and global best practices could depress the rate of GDP growth by as much as one percentage point in the long run.

Competition, which is well rooted in a good part of industry, is making very slow headway in services, especially public utilities. What is wanted is not unrestrained privatization but a system of regulated competition in which the customer, the citizen, is better protected.

Italy lags behind the other main European countries in its endowment of infrastructure, despite having had a higher ratio of public infrastructural spending to GDP from the 1980s until 2008. Under the Government’s programmes the ratio is set to fall to 1.6% in 2012, down from 2.5% in 2009; on average in the euro area, the planned expenditure for 2012 is 2.2% of GDP, down from 2.8% in 2009.

The execution time for projects financed by the European Regional Development Fund is nearly twice as long as scheduled in Italy, compared with average overruns of just one quarter in the rest of Europe, and cost overruns are 40% as against 20%.

The spread of part-time and fixed-term employment contracts in the past fifteen years has helped to raise the employment rate, but at the cost of creating a pronounced dualism within the labour market: on the one hand the better-protected workers with permanent jobs and on the other a vast area of precarious employment, especially among young people, with little protection and low earnings. A more balanced approach to labour market flexibility, which today depends almost entirely on entry mode, would let young people set their sights higher. It would spur firms to invest more in the training of human resources, to integrate them into the production process and to offer them better career prospects.

Women’s low labour market participation is a crucial weakness of the Italian economy, and one on which we are now concentrating our research effort. Today, 60% of Italy’s university graduates are women. They earn their degrees faster and with a better academic performance than their male fellow-students; and they are less and less restricted to the traditional women’s disciplines in the humanities. Yet the employment rate for women is still no more than 46%, 20 points less than for men. It is lower than in practically every other European country, especially in the higher positions and among women with children. Holding education and experience constant, women’s earnings are 10% lower than men’s."

On a brighter note...

Italy had a population of 26 million in 1861 and life expectancy at birth was 29-30 years; the illiteracy rate was almost 80%: adults spent less than one year in school, and "lived in a harsh epidemiological environment, as borne out by health outcome indicators and anthropometric data...Since Italy’s unification, Italian GDP per head has increased about thirteen fold, recording an average annual growth rate of just under 2%. The figure shows a clearly non-linear trend: since the end of World War II, per capita GDP has multiplied over 7 times, while in the previous ninety years (1861-1951) it had just about doubled. If the overall result is remarkable in absolute terms, it appears to be in line with what is found in other countries."

Italy however, has lagged behind the top performers: in 2011 Italian GDP per head was 59% of the US figure, just above the figure for Spain (55%), but still below those of other OECD countries, like Germany (70%), France (71%), the United Kingdom (72%) or Sweden (84%).

Between 1869 and 2005, over 28 million Italians emigrated: over half of them to places beyond Europe (such as the United States, Canada, Argentina and Brazil).

Italy’s Modern Economic Growth, 1861-2011 by Emanuele Felice and Giovanni Vecchi

Greece was star economic performer in 1950-1973; Budget deficits every year since 1974

Irish lessons for Greece on growing exports and investment 

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