Italy: Country profile
Euromonitor International 31 August 2012
In 2012, Italy will enter its fourth recession since 2001. The poor performance is due to several factors including the austerity programme and exporters' dependence on other European markets. Additional cuts in public spending have been made in 2012. Unemployment will rise rapidly during the year, reaching the highest level in more than a decade. Italy currently has the third oldest population in the world and the potential rate of growth could slip further as the population ages.
KEY POINTS
Italy's economy will slip back into recession in 2012 when real GDP is expected to contract by 1.9%. The economy contracted by 0.7% in the second quarter of 2012. This was the fourth successive quarter of decline. The poor performance can be attributed to several factors including the on-going austerity programme and weaker demand for exports in other European markets.
Unemployment was 8.4% in 2011 and it will rise to 10.8% in 2012 – the highest level in12 years. Unemployment would be even higher were it not for the low rate of labour force participation in the South and among women. Youth unemployment has reached 36%.
In June 2012, the government introduced several labour reforms. The main thrust of these changes is to ease entry into the labour market for younger workers on apprenticeships, increase taxes to discourage short-term contracts and give room to employers to lay off workers for economic reasons.
The budget deficit for 2011 was reduced to 3.9% GDP in 2011 and Rome plans to cut it further to 2.7% in 2012. To meet these targets, Rome rushed through an austerity programme and made various spending cuts. However, it soon became apparent that more spending cuts were necessary in order to avoid an increase in the VAT rate in 2012. Accordingly, in July 2012 Italy's government agreed to cut spending by another €26 billion over the next three years. The measures include a 10% reduction in the number of civil servants and cuts to healthcare. The number of provincial governments (currently 50) will also be halved.
FACTS Area
301,245 square kilometres
Currency
Euro (€ = 100 cents)
Location
In the north, Italy meets with France, Switzerland, Austria and Slovenia. In the south, it divides into two peninsulas, the lower of which almost connects with the island of Sicily.
Capital
Rome
GOVERNMENT Head of State
President Giorgio Napolitano (2006)
Head of Government
Mario Monti (2011)
Ruling Party
The government is led by a centre-right coalition.
Political Structure
Italy has been a republic since 1946, when it abolished the monarchy. The president is elected by parliament and 58 regional representatives for a seven-year term and exercises only semi-executive functions. The prime minister is appointed by the president. The 630-member Chamber of Deputies (Lower House) is elected for five years by universal suffrage through a system of proportional representation, as are all but seven of the 315-member Senate.

Last Elections
Napolitano was elected president by Parliament in May 2006. Parliamentary elections were held in April 2008. Berlusconi's centre-right coalition claimed a majority in both houses. In the Chamber of Deputies (lower house) the coalition won 344 seats. These consist of the People of Freedom Party (275 seats), the Northern League (61) and Movement for Autonomy (8). The centre-left coalition has 246 seats of which the Democratic Party has 217 and Italy of Values has 29. Other opposition parties include the Catholic Union of Christian and Centre Democrats (UDC) which took 36 seats. The remainder were scattered among several smaller parties. In the Senate, the centre- right coalition holds 171 seats. Included are the People of Freedom (144 seats), the Northern League (25 seats) and the MPA (2 seats). The centre-left coalition has 133 seats in the Senate made up of the Democratic Party (119 seats) and Italy of Values (14 seats). The Catholic UDC received 3 seats and the remainder were scattered among smaller parties and independents. Monti took over as prime minister after Silvio Berlusconi resigned once new austerity measures were passed by both houses of parliament.
In June 2011, referendums were held on four separate issues – the privatisation of water services (two issues), a return to nuclear energy and a decision on whether the prime minister should continue to enjoy immunity from prosecution while in office. An overwhelming number of voters rejected all four proposals.
Political Stability and Risks
Italy is thought to have Europe's most rigid labour market. The number of jobless is the highest in the impoverished south where one person in five is looking for work.
International Issues
The Italian government is concerned about the number of illegal immigrants arriving from Libya.
Italy has never accepted the claims made by some Austrian groups regarding the German-speaking South Tyrolean regions in Trentino. However, it does demand compensation from Slovenia for the dispossession of Italian citizens during the post-war era.
Government Finance
Continued overspending has resulted in a massive debt load. In 2011, public debt stood at €1,898 billion – equivalent to 120.1% of GDP. Italy's debt, however, is owned mainly by Italians rather than foreigners (as in the case of Greece).
The budget deficit for 2011 was reduced to 3.9% GDP in 2011 and Rome plans to cut it further to 2.7% in 2012. To meet these targets, Rome rushed through an austerity programme in July 2011. Total savings were estimated to be €70 billion. Lenders were not impressed since most measures would not take effect for several years. Bond holders and European partners demanded more stringent efforts and Rome quickly adopted a second austerity package intended to balance the budget by 2013. It entails a rise in sales taxes, a revised wealth tax and a crackdown on tax evasion. Since taking office in November 2011, the new government has overhauled the pension system and pushed through €20 billion in tax hikes and spending cuts as well as measures to deregulate services and cut red tape. However, it soon became apparent that more spending cuts would be necessary in order to avoid a very unpopular increase in the VAT rate later in 2012. Accordingly, in July 2012 Italy's government agreed to cut spending by another €26 billion over the next three years. The measures include a 10% reduction in the number of civil servants and cuts to healthcare. The number of provincial governments (currently 50) will also be halved.
Spending on social security and welfare accounted for 39.1% of all government expenditure in 2011 followed by spending general public services (17.3%).
ECONOMY
Economic Structure and Major Industries
The agricultural sector employs only 3.3% of the work force but is well diversified, producing soft fruits and vegetables as well as wheat, olives and citrus products for export. The most fertile areas are in the north. In the south, agriculture is mainly for subsistence purposes. More than 70% of the country's farms are small and inefficient. Manufacturing accounts for 14.7% of GDP and employs 18.6% of the work force. There are relatively few large private companies, but those that exist play a major role in the economy. Examples are Fiat, which is controlled by the Agnelli family; Pirelli, controlled by the Pirelli family; and Fininvest, controlled by ex-Prime Minister Berlusconi. More than 90% of the industrial sector is made up of small and medium-sized firms that are mainly found in the north-east and the centre of the country. Many of these small firms serve as suppliers to German industry but others are exposed to competition from China, Indonesia, Turkey and Eastern Europe. Italy's producers of clothing and textiles are major suppliers of fashionable products of high quality and compete aggressively in the world markets. Manufacturing output (in real terms) rose by 3.7% in 2010 but contracted by 1.4% in 2011. Car sales in the first half of 2012 were down by 20%.
The service sector makes up 64.4% of GDP. Italy's tourist industry remains important though it has lost much ground relative to other destinations. The real value of tourist receipts rose by 3.1% in 2011 but will fall by 0.6% in
2012. The deteriorating economy has cut into banks' profits and reduced the quality of assets. Credit ratings for several banks were cut in late 2011 and again in 2012. Consumers' buying habits are changing as more people turn to discount outlets and lower-priced, non-branded items. In February 2012, activity in the service sector fell for the ninth straight month.
Overview of the Economy
Italy's economic performance has lagged behind that of other EU members throughout for more than a decade. There has also been a decline in potential economic growth while costs are rising as productivity growth stagnates. These problems are rooted in country-specific factors such as the vulnerability of small, family-owned Italian firms and their patterns of product specialisation.
Real GDP grew by just 1.8% in 2010 and virtually stagnated in 2011. The real disposable income of households declined sharply. Employment also fell and domestic demand was weak.
The economic gap between Italy's north and south is striking. In the north, thousand of small and medium-sized firms are geared mainly to serve buyers in Germany. These firms specialise in the manufacture of premium finished products that are bought by German multinationals for assembling high-end goods that include everything form cars to washing machines. In contrast, most industry in the south is controlled and financed by the state. Income in the north is roughly equal to that in Germany but in Italy's south per capita income is less than that of Portugal. Unemployment in some parts of the south is as high as 40%.
Foreign Trade
Italy faces increasing competition (in both domestic and international markets) from eastern European and Asian suppliers. The country's share of world exports (in volume terms) has fallen steadily. Hardest hit have been traditional exporters such as textiles, leather and apparel. Growth of overseas demand in these markets has been weak but the gains recorded by Italy's exports have been even lower. In 2011, exports amounted to 23.8% of GDP. Growth of exports (in dollars) was 17.1% in 2011 but in 2012 a decline of 1.5% is expected.
Like most EU countries, a large portion of Italy's exports go to other members of the EU. In 2011, 56.7% of all exports went to other EU members and 69.8% went to other countries in Europe. Germany and France are the largest export markets. The dominant export sector is machinery and transport equipment which accounted for 36.3% of total exports in 2011.
The current account deficit was 3.3% of GDP in 2011 and it will narrow to 1.9% in 2012.
Economic Prospects
Italy's economy will slip back into recession in 2012 when real GDP is expected to contract by 1.9%. The economy contracted by 0.7% in the second quarter of 2012. This was the fourth successive quarter of decline. The poor performance can be attributed to several factors including the on-going austerity programme and weaker demand for exports in other European markets. Industrial specialisation in low-tech and medium-tech goods – products which face tough international competition – is another drawback.
Personal debt is low but consumer credit has contracted. Household spending is also fragile owing to the high level of unemployment and a decline in personal income. Private final consumption (in real terms) rose by 0.1% in 2011 and a decline of 2.7% is expected in 2012. Growth in household income will continue to be sluggish; any rebound will depend on solid gains in self-employment income. More than 70% of home mortgages are at variable rates, leaving households vulnerable to any interest rate hikes. In May 2012, consumer confidence hit a 15-year low. Unemployment was 8.4% in 2011 and it will rise to 10.8% in 2012 – the highest level in 12 years. Regional and demographic disparities in unemployment rates are also large. Unemployment would be even higher were it not for the low rate of labour force participation in the South and among women. Youth unemployment has reached 36%. In June 2012, the government introduced several labour reforms. The main thrust of these changes is to ease entry into the labour market for younger workers on apprenticeships, increase taxes to discourage short-term contracts and give room to employers to lay off workers for economic reasons. Other changes widen the welfare system to encourage labour mobility.
Evaluation of Market Potential
The pace of growth will continue to be feeble in the medium term. Renewed financial turmoil could push government bond yields up, tighten bank credit, and further weaken the economy.
Labour productivity is low relative to other EU member states and the pace of structural reform has been too slow. Italy's GDP per capita has not grown significantly in the last 10 years, one of the worst performances among advanced economies. A steady loss in competitiveness over the past decade, if unaddressed, will remain a drag on growth.
Italy's share of the global stock of inward FDI is only about 2%. The country has limited appeal among multinational corporations interested in investing abroad in order to gain access to skilled resources and/or to consolidate their market power.
The potential rate of growth could slip as the population ages. New policies are needed to boost competition and improve the business climate. A recent IMF survey noted that the legal processes involved in enforcing a contract took six times as long in Italy as in an average industrial economy. FDI – though high in the north – is far less than that in the UK, France and Germany. In the underdeveloped south, FDI is virtually non-existent.
BUSINESS ENVIRONMENT
The government's privatisation programme is ambitious but has made only modest progress. The state still holds controlling interest in key industries. These include energy, transportation and telecommunications. Most utilities at local levels also continue to be publicly owned. Government spending represents 50% of GDP. The tax system is unduly complex and subject to abuse. Corruption remains a problem and the judicial system is weak. A more simplified tax system would reduce the extent of tax evasion.
According to the IMF, product and labour market reforms – for example, speeding the opening of professions like accountants and pushing for more privatisations – and liberalisation of the service sector could increase Italian growth by around 6% in the medium term.
The government has pushed through limited reforms to the country's pension system. A new law has raised the retirement age from 57 years to 60 years but only took effect in 2008. In the future, it should save the treasury about 0.7% of GDP per year. The reform will also go some way towards reducing Italy's huge debt.
The informal economy in Italy accounts for 16-17% of GDP and is thought to deprive the government of at least €120 billion in unpaid taxes. The government has promised to closely monitor wealth accumulated by Italians to crack down on fraud and lower the limit of payments that can be made in cash.
Table 1 Indicators of Business Environment: 2011
Indicator
Ease of doing business rank (out of 183) 87 Starting a Business
Cost (% of GNI per capita) 18.2 Time (days) 6 Dealing with construction permits
Time (days) 258 Cost (% of GNI per capita) 138.1 Employing workers
Minimum wage for a 19-year old worker or an apprentice (US$/month) 1,641.40 Ratio of minimum wage to average value added per worker 0.37 Tax rate
Total tax rate (% profit) 68.5 Labour tax and contributions (% of commercial profits) 43.4 Time (hours per year) 285 VAT (%) 20.0 Exporting
Documents for export (no.) 4 Time to export (days) 20 Cost to export (US$ per container) 1,245 Importing
Documents for import (no.) 4 Time for import (days) 18 Cost to import (US$ per container) 1,245 Protecting investors
Strength of investor protection index (0-10) 5.7 Closing a Business
Time (years) 1.8 Cost (% of estate) 22
Source: Euromonitor International based on the World Bank
Note: The cost for starting a business is recorded as a percentage of the economy's income per capita. It includes all official fees and fees for legal or professional services if such services are required by law. In the absence of fee schedules, a government officer's estimate is taken as an official source. In the absence of a government officer's estimate, estimates of incorporation lawyers are used. Figures for dealing with construction permits records all procedures required for a business in the construction industry to build a standardised warehouse. Cost is recorded as a percentage of the economy's income per capita. Only official costs are recorded. All the fees associated with completing the procedures to legally build a warehouse are recorded, including those associated with obtaining land use approvals and preconstruction design clearances; receiving inspections before, during and after construction; getting utility connections; and registering the warehouse property. The total tax rate measures the amount of taxes and mandatory contributions borne by the business in the second year of operation, expressed as a share of commercial profit. Doing Business 2011 reports the total tax rate for calendar year 2010. The total amount of taxes

borne is the sum of all the different taxes and contributions payable after accounting for allowable deductions and exemptions. Time is recorded in hours per year. The indicator measures the time taken to prepare, file and pay 3 major types of taxes and contributions: the corporate income tax, value added or sales tax and labor taxes, including payroll taxes and social contributions. Doing Business compiles procedural requirements for exporting and importing a standardized cargo of goods by ocean transport. Cost measures the fees levied on a 20- foot container in U.S. dollars. All the fees associated with completing the procedures to export or import the goods are included. The cost does not include customs tariffs and duties or costs related to ocean transport. Only official costs are recorded.The strength of investor protection index is the average of the extent of disclosure index, extent of director liability index and the ease of shareholder suits index. The index ranges from 0 to 10 with higher values indicating greater investor protection. The cost of the proceedings for closing a business is recorded as a percentage of the value of the debtor's estate.The cost is calculated on the basis of survey responses and includes court fees and government levies; fees of insolvency administrators, auctioneers, assessors and lawyers; and all other fees and costs.
ENERGY
Italy has 1.5 billion barrels of proven crude oil reserves. There are three main oil-producing fields in southern Italy and other fields located offshore in the Adriatic and in Sicily (both onshore and offshore). The country produced 5.4 million tonnes of oil equivalent in 2011.
Italy also has 0.1 trillion cubic metres of proven reserves of natural gas and produced 7.2 million tonnes of oil equivalent in 2011.
The government plans to extend its moratorium on nuclear energy indefinitely.
SOCIETY
Population
Italy's population has been growing at an average rate of 1.3% per year and in 2012 it was 60.9 million. The median age was 43.8 years in 2012 – significantly higher than the regional average. In fact, as measured by median age of population Italy currently has the third oldest population in the world (behind Japan and Germany). Pensions account for 14% of GDP and are rising.
The fertility rate has risen slightly in recent years but at 1.4 births per female it is lower than the regional average and well below the replacement level.
Virtually all the country's population gains in recent years are due to immigration. More than 5 million immigrants are presently living in Italy – either legally or illegally. Most immigrants live in the central and northern regions of the country, providing manual labour in factories, on farms or as caregivers to Italy's ageing population. On average, the country's immigrants are about ten years younger than the Italian-born population.
Income and Expenditure
Italy's savings ratio is relatively high. In 2011, savings were 8.6% of disposable income and the share will fall to 8.5% in 2012.
In 2011, consumer expenditure fell by 0.4% in real terms. It totalled €16,119 (US$22,413) in that year. Disposable income per capita declined by 1.2% and was €17,371 (US$24,153) in 2011.