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Italian Economy In Recession: Are new crisis in the Eurozone?

Dora Christofi | Feb. 15, 2019
Italian Economy In Recession: Are new crisis in the Eurozone?

February 15, 2019 | SQUARED DIRECT - Italy, the 8th largest economy in the world and the 4th largest in Europe, is in trouble. In the last 3 months of 2018 the Italian GDP had contracted by 0.2% following the 0.1% contraction that happened in the third quarter of the same year.

While there was a rise in Italian exports, the didn’t manage to offset the downturn in all sectors of the economy which is now in recession with further decline forecasted to continue in 2019. The coalition government of Italy was forced to revise its 2019 budget after the EU raised concerns over the budget’s impact on debt.

Italy’s woes however are nothing new. It’s been more than a decade that the country has been experiencing poor growth and economic stagnation with absolute poverty rising to about 5 million people in 2017 according to the Italian Bureau of Statistics(Istat).

Amongst rising income inequalities, wage stagnation and poverty, Italy has an outstanding debt of 132% over its GDP (2.3trn euro), the largest in Europe, and hundreds of billions in toxic debts in its banking system.

Sluggish Growth in Eurozone

Since 2008 Eurozone austerity policies have polarized Italians and turned them pessimistic towards Europe while failing to resolve Italy’s economic problems. Italian society is also demoralized by mass emigration and unfavorable working conditions. As in the case of Greece, EU governments had suggested an austerity package of curbed spending and structural reforms that included privatization, public sector liberalization and labour market flexibility policies with losses in the financial sector to be covered by tax payers. But Italy is a much bigger economy than Greece and a collapse could have serious ramifications for the entire Eurozone.

Economic growth in the Eurozone has currently flat-lined with major Economies like Germany, France and Spain experiencing their own problems of stagnation. By the end of 2018, growth for the whole of Eurozone was at a meagre 0.2%, same as the previous quarter. 

Germany barely managed to avoid recession, France saw growth at just 0.3% and Spain at 0.7% according to Eurostat. Much like the case of Italy, a rise in exports did not manage to offset other negative factors like a decline in domestic deflationary demand and lack of competitiveness.

During the past decade, the Eurozone turned into an export oriented economic model based on debt that promotes competitiveness in global markets by favouring deflationary internal demand and long-term wage moderation regardless of how economies that comprise it fare on an individual basis.

In turn, this created an interconnected system of economies that are highly vulnerable and can negatively affect one another. When one of them is experiencing lower growth then the rest are slowed down. And when one collapses, the rest will probably follow like dominoes.

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