Prime Minister Silvio Berlusconi and his cabinet are still dithering over new growth and debt reductions EU leaders demanded for Italy at the last EU summit.
Italy continues to struggle with a public debt equal to about 120% of GDP and dismal growth prospects. In their most recent note, a cross asset research team from SocGen says these problems aren’t likely to vanish anytime soon.
– Base case scenario is for a recession sometime in 2012-2013. It’s “more a matter of when, rather than if.”
– Employment will continue to fall.
– Lending is just getting tighter.
– Inflation is “stubbornly high,” clocking in at 3.6% year-over-year in September.
Their prognosis? Italy must undertake reforms, and not (primarily) through austerity.
– Italy’s labour market is “highly dysfunctional.” Italy needs to remove some of the barriers to entry into the labour market, particularly for younger workers. Wage bargaining could also be decentralized.
– More R&D and new incentives to expand businesses will make Italy more competitive.
– Privatizations could help, but not that much. Their impact just isn’t that significant.
But neither EU leaders nor investors should expect any landmark change anytime soon, these analysts argue:
While the process of deficit reduction is finally under way, the process of debt reduction has merely begun and remains subject to significant risks. On our estimates, Italy needs a primary surplus of at least 3% merely to stabilise its debt ratio, and of around 5.5-6% to bring it down credibly and decisively. Above all, only when structural reforms result in Italy’s growth potential rising from close to zero today to at least 1.5% yoy will its debt be on a robust downward trajectory. Until then, Italy’s fiscal adjustment will remain vulnerable and subject to risks.
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