Insoluble tasks for Italy′s new government | Europe| News and current affairs from around the continent | DW | 30.04.2013
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Insoluble tasks for Italy's new government

The new Italian Prime Minister Enrico Letta is making stops in Europe's centers of power to lay out some of his key positions. But the challenges Italy faces are numerous, and the new government is shaky.

Opinions differ sharply as to where Italy stands economically. US economist Nouriel Roubini already views the eurozone's third largest economy as insolvent. German economist Wolfgang Franz, on the other hand, believes just the opposite. "Italy," he claims, "has a very strong and solid economy."

So who's right? Both, argues Anton Börner, president of the German Wholesale, Foreign Trade and Services Federation. "As a state, Italy is insolvent, but as a country, it's as rich as Germany," he says. "Average income in northern provinces such as Lombardy and Piedmont is significantly higher than it is in the EU as a whole."

Rigid labor protection laws

But in the land of big names like Armani and Ferrari, Börner points out that numerous companies have been hugely successful not because of the political and economic structures but in spite of them. He points to the labor market as an example. "If you employ more than 15 people, you have no way to adjust to economic downturns because you can't lay off people," he told DW.

Letta speaks at the Lower house of the parliament REUTERS/ Alessandro Bianchi

Letta's first speech to parliament has been well received, but there needs to be much more

As a result, companies shun hiring new employees, and young people suffer the most. Every third person in Italy under the age of 25 is unemployed. The overall unemployment rate has risen to a record high of more than 11 percent. Stringent job projection for employees in companies with 15 people on their payrolls has resulted in many enterprises choosing not to invest and remain small.

And there is yet another reason why so little is being invested in Italy, adds Börner. "The relevant laws are very obscure," he says. "They are often contradictory so that a company has to wait a long time for approval - but, without approval, it can't do anything." And when a company finally receives approval after two or three years, the market has likely changed, so it's wiser not to invest in the first place, he adds.

Stagnation and recession

German companies spend about 5 to 6 percent of their turnover on research and development, compared to less than 1 percent by Italian companies. It's no wonder that the competiveness of the Italian economy has declined drastically.

"If you look at the world markets, you hardly find any Italian companies," says Börner. Global competition from Italian mechanical engineering companies, long feared by German rivals, has never materialized, he notes, adding that Italians now jealously observe how Germany's strong exports to East Asia have more than offset the weak demand in recession-hit Europe.

For Italy, stagnation and recession have become everyday reality. Since the financial crisis erupted in 2008, its gross domestic product has shrunk by 5 percent, and industrial output has declined by a quarter. Adding to the misery, the debt ratio has soared to a dizzying height, despite a sharp decline in new debt.

A model wears a creation of Dolce & Gabbana men's Fall-Winter 2013-14 collection, Photo:Antonio Calanni/AP/dapd

Italy has famous names - such as Dolce & Gabbana fashion - but it's no longer a world industrial player

This year, Italy's total debt will reach 130 percent of economic output - the highest level ever in the country. Assuming that the country can continue to borrow at 4 percent interest rates, its economy will need to show around 5 percent nominal growth to maintain the debt ratio where it is. But because the country is clearly unable to grow at this pace, "some serious economists claim Italy will never be able to repay its debt and its debt ratio will inevitably go on rising," says Clemens Fuest, President of the Centre for European Economic Research in Mannheim.

Few headaches

Yet the fact that their state has such debts seems to give Italians few headaches, according to Börner, an Italian expert who spends about four months a year in the country. "Every group thinks only about itself and is unwilling to give up anything," he says. "No one is prepared to make any compromises in the interest of Italian society."

That is also why the new government in Rome has sparked little euphoria among Italian insiders, as it has with the financial markets. "It will not be a stable government because the new team is trying to bring fire and water together," says Börner. "That just can't work."

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