I’ve put together a few charts of Italy to illustrate the problems facing the beleaguered country.
1) Italy’s bond yields remain high.
Despite the exit of Berlusconi, the market remains far from convinced that Italy can overcome its problems. The country is blighted by a lack of infrastructure development, market reforms and research investment. Furthermore, the much needed reforms depend on support of the Italian parliament which for now is backing Mario Monti but for how long? Unless the markets are convinced that reforms will be both implemented and successful, bond yields will remain high, making Italy’s financing costs much more expensive. This is an argument for large scale intervention by the ECB, to keep bond yields lower while reforms and European integration can progress.
2) Italian debt-to-GDP.
The size of Italian debt is now over 120% of GDP, the second highest in the Euro Zone behind Greece. The financing of such massive debt is a huge drag on the economic growth and when the economy has been left to rust, as Italy’s has, economic growth is hard to generate.
3) GDP Growth
The Italian economy has struggled with weak growth for the last ten years. Berlusconi was in power for eight and a half of these years but failed to address the problems. The end of Berlusconi brings the hope that reforms can be implemented but the clock is ticking for the Euro, can it wait for these to be implemented? Will the politicians and voters put up with the inevitable pain?
4) Italy’s budget deficit.
Italy’s budget deficit is currently one of its brighter stats given that it stands as one of the lowest in the Euro Zone, estimated to be -3.9% in 2011, according to the OECD. This is good news because it shows that the size of the country’s, although large, is not increasing substantially. Therefore, any savings that can be made can contribute to a reduction of the debt rather just reducing the deficit.
The chart also shows when the massive debt was accumulated, with several years of deficits over 10% in the 1980s.
5) Industrial Production Growth YoY.
The growth in Italy’s industrial production over the last ten years is highlighted by Figure 5 and averages -0.3%. Structural reform needs to be implemented to help boost industrial production.
Italian unemployment has risen during the financial crisis but has not reached the double digit level so the 1990s. this is below the Euro Zone average of 10.2% in 2011 Q3.
7) Labour productivity.
(i) Real labour productivity per hour worked.
The gap in labour productivity between Italy and Germany has grown since 2000.
(ii) Productivity growth.
YoY labour productivity growth has average only 0.3% in Italy compared to 1.3% in Germany since 2000.
These eight charts highlight Italy’s problems, however, change will not come quickly and given the deterioration of confidence in the Euro-Zone project, Germany will need to agree with other Euro-Zone leaders and possibly the ECB how Italy can continue to finance its debt.