The solid economic fundamentals of a country that's already growing

THE BERLUSCONI GOVERNMENT 2008-2011 - Fundamentals of the economy and the economic policy

2013: balanced budget. 2014: primary surplus 5.7% and public debt-to-GDP ratio of 112.6%
The 4th Berlusconi government has consolidated public finances, so as to achieve the goal of a balanced budget in 2013. The public debt has been placed back on the path to gradual reduction.
In 2014 we will have a budget surplus of 0.2% of GDP, a primary surplus of 5.7% of GDP and a public debt-to-GDP ratio of 112.6% (Note updating the DEF, 22 September 2011).
In order to achieve this goal, two budget manoeuvres were approved in record time over the summer that will allow for a deficit trend correction for the 2011-2014 quadrennial of respectively 0.2%, 1.7%, 3.3% and 3.5% of GDP, meaning approximately 60 billion euro (Note updating the DEF, 22 September 2011).
A substantial primary surplus of 0.9% of GDP is expected for 2011. Despite increased debt servicing costs, this will allow for a reduction of the debt/GDP ratio in 2012 (to 119.5% as compared with 120.6% in 2011) (Note updating the DEF, 22 September 2011). The data for the first eight months of the year indicate we are in line with this objective.

Public administration needs and debt reduction
In the first 8 months of this year the public sector borrowing requirements, net of real estate divestments, amounted to 50.5 billion: 2.2 billion less than in the same period of 2010. Excluding disbursements on behalf of Greece and Italy's share of European Financial Stability Facility (EFSF) loans, those needs were reduced by 6.8 billion (Ministry of Economic and Financial Affairs).
Moreover, the increase in the public administration's debt registered in the same period was equal to 56.7 billion, down from the same period in 2010 (78.4 billion). As of August the debt had once again fallen below 1.9 trillion (Bank of Italy, Public Finances, needs and debt, 14 October 2011).
 
Prudent and rigorous management of public finances since 2008
The public finances consolidation carried forward by the 4th Berlusconi government are not limited to the interventions enacted in 2011, however it dates back to 2008. Indeed, Italy faced the years of the international downturn with prudent and rigorous management aimed at containing the inevitable deterioration in public finances as much as possible.
The debt/GDP ratio between 2008 and 2010 rose to a lesser degree in Italy than in other countries, up by 12.7 percentage points in Italy as compared with 25.6 in the UK, 20.3 in Spain, 16.9 in Germany and 14 in France  (Eurostat, General Government consolidated gross debt). 
The country's finances are solid
The spread on Italian bonds in relation to the Bund was been kept under that of many eurozone countries over 2010. In 2007, before the crisis, the BTP/Bunds spread was 20-25 points; from 2008 to 2009 the spread held steady (with the exception of a 157 point spike) at 100, where it stayed until the spring of 2010. The spread then went up, nevertheless remaining under the 200-point ceiling until July 2011. Only in recent months, concomitant with the recent financial market turmoil, has the spread widened, with peaks over 400 base points.
The spread data fail to take notice of many strong points in Italy's financial system: the soundness of our banking system, low indebtedness of families and businesses and the absence of real estate market instability.

The banking system has proven sound and sufficiently capitalized
The five Italian banking groups that participated in the European stress test exercise (UniCredit, Intesa San Paolo, Monte dei Paschi di Siena, Banco Popolare and UBI Banca) thoroughly passed the 5% reference value. The banks involved represent 62% of total national banking system assets. The test confirms the adequacy of Italian bank capitalization and the ability to absorb the impact of an eventual heavy deterioration in the current macroeconomic and market conditions (Bank of Italy, Press Release, 15 July 2011). The banking system has proven sound and sufficiently capitalized.

Low Private sector debt
Italy's overall debt position is sound. In 2009 Italy's gross national debt (i.e. the sum of public, household and corporate debt) accounted for 337% of GDP, as compared with 531% in the United Kingdom, 371% in Spain, 352% in France and 290% in Germany.
Also in 2009, Italian private sector debt (sum of household and financial and non-financial business debt) was 221% of GDP, against the 463% of Great Britain, 318% of Spain, 274% of France and 217% of Germany. In particular, Italian household debt was 42% of GDP, against 103% for Britain, 84% for Spain, 63% for Germany and 51% for France (DEF, 13 April 2011).
Italian families have wealth amounting to over 9 billion euro, meaning that every adult Italian has an average per capita wealth of nearly 190,000 euro, which places Italy in third and eighth position respectively in European and world rankings (160 countries) (Global Wealth Report 2011, Credit Suisse Research Institute).
Italy has the lowest average private debt per adult of all the G7 countries (15,800 euro). Our country is in third place (along with Germany) for absolute number of adults with personal wealth of over 100,000 dollars, preceded only by the US and Japan. Italy is in second place in the world for negative variation in household wealth between 2007 and 2010 after the crisis, with a drop of 3.8%(Global Wealth Report 2011, Credit Suisse Research Institute).

No real estate bubble
We have not had a real estate bubble, and prices did not crash during the crisis. Between 2008 and 2010 real estate values in Italy went down on average 2%, against 5.7% in Spain, 5.4% in the UK and 4.5% in France. Real estate prices in Germany went down on average 0.1% (OCSE Economic Outlook no.89). Considering that more than 80% of real Italian household wealth consists of real estate (Bank of Italy 2009 Study on Household Wealth), their wealth has remained substantially intact.

Problems: low growth, low participation and low productivity
The above positive factors are accompanied by three problems in the Italian economy: low growth, low participation and low productivity. Over the past 15 years Italy's GDP growth has been lower that the Euro area average and fell even lower over the course of the 2008-2009 global macroeconomic recession. This is an indication of a long period of limited dynamism in our economy and, at the same time, its greater sensitivity to the economic cycle.
The potential output growth rate, which measures medium to long-term economic prospects, of the final decade of the last century remained close to the Euro area average (1.9% against 2.2%), but lagged by approximately one percentage point in the decade that followed. This makes our system more vulnerable to the backlashes of the cyclical oscillations and negative effects of the financial and macroeconomic crisis. 
The Italian economy's limited dynamism is rooted in productivity stagnation.
If we take labour productivity, for example, we see that up until the mid-1990s Italy had a growth rate approximately 1.5% above the Euro area average. In the period 1996-2011 average labour productivity growth was 0%, compared with a corresponding Euro area average of 0.9%. 
This inertia is also the cause of Italy's loss of competitiveness. While productivity is lower than that of our other competitor countries, real wages are growing more or less at the same rate as those of other countries. This is causing a greater increase in the unit cost of labour in Italy than in other countries which hinders competitiveness.
Moreover, too many people are not participating in the labour market: the rate of activity in 2010 was 62.2% as compared with a Euro17 average of 71.4%.

New series of national accounts
In any case, it is worthy to point out that a new series of national accounts show that in 2010 Italian GDP grew by 1.5% and not by1.3% and, over the two years of the crisis, GDP fell less than previous estimates (-1.2% instead of -1.3% in 2008, and -5.1% instead of -5.2% in 2009).

Reassuring signs: social cohesion, long-term sustainability of social expenditures increased tax compliance
However, there are some reassuring indicators that have characterized Italy for over a decade.
Employment rates closer to European average
Although they remain low, our employment rates are close to the European average; the difference, as compared with the average Euro17 countries, was  7.7 percentage points in 2000, against 7.3 in 2010 (Eurostat, Employment rate – 15 to 64 years).

Unemployment rates contained and lower than the Euro area
Moreover, beginning in 2003, Italy's unemployment rate was below the Euro area average and remained fairly low even through the crisis years (in the 2008-2010 triennial, respectively 6.7%; 7.8%; 8.4% against Euro17 averages of 7.6%; 9.6% and 10.1%); as of August, the latest data available, the rate of unemployment in Italy stood at 7.9%, which is to say 2.1 percentage points lower than the Euro17 average (Eurostat). 

Guaranteed social cohesion
We faced the global crisis appropriately by ensuring social cohesion and avoiding tensions. Indeed, there was a slight decrease from 2007 to 2011 in the hours lost on strikes against major firms (peak number of strike hours for every 1,000 hours of actual work time in major firms: 2007 = 4.8; 2008= 4; 2009 = 2.9; 2010 = 2.9 and to date in 2011 = 4.5) (ConISTAT database).

Human capital preserved and social safeguard network expanded
During the crisis social buffers allowed for preservation of human capital and, with the extension of unemployment supplements, the network of social safeguards expanded. The resources made available amounted to approximately 38 billion euro, equal to over 2% gross domestic product.
In 2008, a total of 228 million hours of unemployment supplement were authorised, 914 million in 2009 and 1.203 bullion in 2010. In the first 9 months of 2011 a total of 732 million hours were authorised, (INPS, Osservatorio sulla Cassa Integrazione Guadagni).
Addressing the effects of population ageing on public finances
Over the years our country has enacted major reforms to address the effects on public finances of the population's ageing, and thus increase their long-term sustainability. Growth in public expenditures associated with ageing for the 2007-2060 period is estimated at only 1.6% in Italy, against 4.8% in Germany, 2.7% in France and 9% in Spain (European Commission and Economic Policy Committee, 2009 Ageing report).

Major successes on the tax evasion front
There have been major successes over the past three years on the tax evasion front, with the recovery in 2008 of approximately 11 billion euro, which more than doubled in 2010 (25.4 billion euro) (Agenzia delle Entrate, INPS and Equitalia, 10 February 2011)
A bilateral agreement with the Swiss Confederation is under way. The aim is to tax financial capitals of Italian citizens not residing in Switzerland. This would allow for recovery of 15-17 billion euro.

Italian economy: some improvements
The latest business statistics on orders, production and turnover show significant improvement as compared with previous months.
As of August, orders were up 5% based on the current economy and 10.5% compared with August of 2010 (ISTAT, Fatturato e ordinativi dell'industria, 19 October 2011).
Production in the same period rose by 4.3% based on the current economy with a trend toward 4.7% (ISTAT, Produzione industriale, 10 October 2011).
Turnover  increased by 4% as compared with the previous month, and by 12% as compared with August  2010 (ISTAT, Fatturato e ordinativi dell'industria, 19 October 2011).
These data, read with due caution while awaiting further confirmation, constitute a positive signal that our economy's productivity is on the rise.
As for foreign trade, exports rose, albeit slightly, on the strength of the 2010 recovery, showing an increase in the month of August of 0.1% as compared with the previous month, while imports were up 0.9%. Nevertheless, analysing the trends, August exports showed a steady upward trend of 16.2%, compared with 12.5% for imports  (ISTAT, Commercio con l'estero, 14 October 2011).

Inflation under control
Overall, inflation is under control. Although the September consumer price index measured a 3% rise over September 2010, inflation remains moderate, leveling off at 2.6% for 2011 (ISTAT, Prezzi al consumo, 14 October 2011).

A liberal reformist agenda to complete
The government has not limited itself to countering the crisis, but has also managed to carry forward the most important reform agenda in recent decades.
Much has already been done; there is a long list of major reforms already enacted, ranging from reforms of the university and public education, public administration and civil service and pensions, to the massive process of reducing norms in effect, reforms and interventions for efficient civil justice, the reorganization and codification of laws for homogeneous sectors, the issuance of the Anti-Mafia Code and, finally, new budgetary procedures.
Others, such as fiscal federalism are in need of additional impetus in order to be brought to term within 2013.
Moreover, with its national reform agenda, Italy formalised the pledge it made to its citizens and European partners to carry out these ambitious structural reforms in such a way as to definitively get beyond the crisis and re-launch the country's intelligent, sustainable and lasting development.

ECB Agenda
The ECB agenda has been largely carried out. That agenda, as regards Italy, outlined in a letter sent on 15 August was, in reality, the government's agenda. The letter did nothing more than accelerate a process already launched by the Berlusconi government with the DEF, the Development Decree and the Budget Adjustment Decree (of July). If we compare the provisions approved by the government with the ECB recommendations we discover that, for the most part, they mirror one another.
Furthermore, with the Development Decree and the Budget Adjustment Decree (of July), no less than 27 pro-growth measures were approved which, along with the next Development Decree, constitute a substantial response to the need to strengthen the economy's growth potential.