Italian Riviera at Moneglia. Photo: Fiore dod. Source: Wikimedia
For the past 10 years incomes have diverged dramatically within the Euro-zone. Germany has done pretty well, most other countries have muddled along, and incomes in Italy have fallen. Per capita GDP in Italy is now 5% lower than it was in 2000. By contrast, the entire Euro-zone is 12% higher and Germany is 20% higher. This isn’t what Italians thought they were signing up for when they joined Europe’s common currency.
There’s no obvious reason why the Italian economy can’t grow faster. They have a world-class manufacturing sector, as evidenced by their Bugatti motorcycles, Ferrari cars, and Versace fashion. Northern Italy is fairly affluent by European standards, and southern Italy has beautiful tourist attractions. The Euro should make credit cheap and readily available. What’s gone wrong?
Source: St. Louis Fed
Italy used to export a lot of low value-added goods, like textiles, shoes, and furniture. Competition from Asia has been brutal. A rigid labor market means that there isn’t as much incentive for people to change jobs and shift to new, more competitive sectors. Silvio Berlusconi tried a couple of times to make reforms but learned that there was little electoral benefit in this. Now the reform parties want to re-impose Sunday and lunch-time closures in retail activities.
This is what’s behind the electoral chaos in Italy. A strong currency has hurt their global competitiveness, and bureaucratic restrictions make it hard to adjust. Recent reforms have made it a little easier to do business in Italy, but it can take some time for these to have an effect on the overall economy.
Source: Trading Economics
This doesn’t mean that Italy is a bad investment right now. In fact, their exports have been growing lately, up 13% since 2013. The direction is good. But the road to Italian growth may be a little bumpy.
Douglas R. Tengdin, CFA