Italian economy on path to reform to escape stagnation

Italy faces enormous challenges. The Italian economy is in its third recession since 2008, having contracted for the second consecutive quarter by 0.2% in Q2 2014.

Italy’s economic weakness is largely due to long-term structural problems with the economy – a bloated civil service, powerful trade unions, high taxes and a discredited political elite.

Successive governments have attempted to stimulate the economy by increasing public spending – Italy’s public debt now stands at an unsustainable 135% of GDP and the country is facing tough austerity measures as it struggles to adhere to EU rules and keep its budget deficit under 3% of GDP. As the Eurozone’s third largest economy, Italy’s economic weakness poses a threat to the revival of the Eurozone as a whole.

Mr Renzi’s Revolution

However, there are some reasons to be optimistic – Matteo Renzi, the fifth Italian prime minister since the global financial crash, marks a break with the past and has an ambitious reform agenda combining economic structural reform and austerity with a more growth focused strategy and a promise not to increase taxes. Historically, Italy has managed to achieve above EU average levels of growth and service a surprisingly high level of government debt. If Mr Renzi manages to execute his reform programme, which he describes as a ‘revolution’, Italy could surprise on the upside and escape some economists’ predictions of years of stagnation.

Italian Equity Market and Winds of Change in Corporate Italy

With regard to the Italian stock market, it is easy to dismiss Italy as an investment market, due to the wider Italian economic malaise. However, over the last year and since Mr Renzi’s election 7 months ago, the Italian equity market has outperformed both Germany and France, the Eurozone’s two largest economies.

There are encouraging changes as the cross-shareholdings and shareholder pacts in place since the Second World War are dissolving and reducing the power of controlling cliques, affecting giants such as Mediobanca, Generali and Telecom Italia. Privatisations are also helping open up the Italian market and an increase in the free float of equities is making Italy more investable for institutions and foreign investors. This is leading to improvements in corporate governance and more interest from smaller companies in gaining a listing, as well as an increase in private equity investment.

[Matthew Clark, 30 September 2014, article written for Citywire]

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