Italy Security, Trade and the Economy Uncategorized Western Europe

The Budding Grape Vine: Italy’s Struggling Economy

Italy is the second largest producer and exporter of wine in the world. Famous for both its red and white varieties, Italian wine is world-renowned as a standard of the Italian spirit of exceptional quality. But unlike a great wine, Italy’s economy, has not improved with age. The Italian economy, the third largest in Eurozone, has struggled since the beginning of the 21st century. After decades of post-war development and economic growth, the economy slowed to a snail’s pace in the early 2000s after GDP growth stagnated. Public debt of 124% of GDP and an unemployment rate of 12% of the labor force means Italy is still struggling to recover from the impact of the 2010 European Debt Crisis. As in many other Eurozone economies, youth unemployment remains incredibly high at 40%, 14 points higher than the OECD average.

After the fall of Italian Prime Minister Silvio Berlusconi, one voice broke through the noise and chaos which usually clogs and obscures Italian politics: Matteo Renzi. Upon taking the post in February 2014, he became the youngest Prime Minister since Italian unification. Described by his enemies as “il rottamatore” – or the scrapper, Prime Minister Renzi has since embarked upon an audacious campaign of political, social and economic reform. Cleaving away at Italy’s stagnant bureaucracy and antiquated constitution, Renzi aims to chart a new course for Italy in the 21st century. Chief among his promised reforms is the ‘Jobs Act’; a series of packages and bills aimed at reforming and opening up the Italian economy.

The ‘Jobs Act’ – dubbed Renzi’s ‘New Deal’, is the Prime Minister’s first opportunity to reform Italy’s draconian and archaic labor system. In principle, the Jobs Act aims to reform employment, contracts, dismissals and unemployment compensation laws in order to encourage a more open, and less static labor market. Short-term contracts will be subject to increased taxes in order to promote long-term job creation. Similarly, employers will be offered tax breaks for up to three years on open-ended contracts in order to encourage further long-term job creation. Renzi hopes his reforms will increase job creation and facilitate more competitive business growth.

Likewise, corporate re-structuring will now allow companies to change employee job positions, duties, and salary in order to match the condition of the economy. The Jobs Act, will also liberalize the way employers handle dismissals and unfair termination. Employees will no longer be allowed to seek reinstatement if unfairly terminated and instead will be offered benefits and monetary compensation. The Jobs Act, according to the Prime Minister, will give the country “a chance to regain its international competitiveness and remove the blockages that have been choking progress in the economy for decades.”

For Italian Minister of Finance and Economy, Pier Carlo Padoan, the seeds planted by Renzi’s overhaul are finally starting to show signs of life. “The reform agenda has been accelerating and is beginning to bear fruit” according to the minister. “So there is a virtuous circle of more jobs, more confidence, more consumption.” While the economy may be rebounding, Renzi must continue to make every effort to continue the reform program.

First, Renzi should continue to prioritize business growth and employment. Reforming Italy’s two-tiered employment structure, in favour of a new middle, was a victory for modernizing the Italian labor market. By cutting some benefits to costly open-ended or ‘life-time’ employment and limiting the length and scope of short-term contracts, Renzi is pushing forward the emergence of a new middle ground. Employers can now hire and fire more easily, and importantly, more in line with current market conditions. Cutting back on the number of temporary or short fixed-term contracts should be a focus of the Renzi administration in order to create better job stability, push domestic consumer demand, and create a stronger long-term tax base.

Likewise, Italy should invest in entrepreneurship and, according to Padoan: “support innovation.” Promising Italy its own Silicon Valley, the Renzi government should prioritize investment into innovative technologies. This might be achieved by increasing the Italian government’s R&D investment, currently 1% lower than the OECD average, at 1.3% of GDP. Encouraging start-up enterprise and innovation will go hand-in-hand with the firm & business expansion reforms passed by the Jobs Act making it easier for small business owners to expand their businesses.

Next, Renzi should continue to reduce the public debt load of the country in order to meet European Commission targets. Reducing debt through spending cuts and privatizing government assets should be continued in pursuit of the debt reduction. This strategy and serious commitment to fiscal policies popular with German Chancellor Angela Merkel have not gone unnoticed around the continent. According to Roberto D’Alimonte, a political analyst in Florence, “Italy can make or break the European Union…Look at Italy from Berlin. What other leader can Merkel trust? Renzi is the only one.” This fiscal commitment might win Renzi the time and flexibility, to reform the Italian economy and cut down on budgetary deficits by 2018.

Lastly, Prime Minister Renzi should continue to pursue wide-reaching employment plans through infrastructure upgrades and persistent public spending. Aging infrastructure, a problem across many Eurozone economies, must be upgraded to increase productivity, cut down on shipping costs and wait times, and at the same time create employment for low-skilled labour.

There is still a large mountain to climb if Renzi is to reform the struggling economy. Confidence is returning to the Italian economy, but Renzi should continue to pursue a platform of swift change and growth in order to keep the recovery alive. For the first time since the debt crisis, however, the wine glass appears half-full rather than half-empty.

Michael Oshell
Michael Oshell is a Research Analyst at the NATO Association of Canada. Previously, he was the Program Editor of the International Business and Economy Program. He is a graduate of Queen’s University with a Bachelors of Arts in Political Studies where he studied international political economy, European politics and international relations theory. Prior to his time at the NAOC, Michael was the Co-Managing Editor of Politicus Journal, an undergraduate academic research journal located at Queen’s University. He has also volunteered on conferences with the Centre for International and Defence Policy. In his leisure Michael enjoys reading The New Yorker, cooking, and dreaming about Pitti Uomo.