The eurozone crisis has finally knocked on Italy’s door – and rather brutally at that. At one level this is surprising. Unlike Greece, Italy has gradually brought its deficit under control in recent years, and cut its high ratio of debt to gross domestic product. Unlike Ireland, Italian banks have been only moderately affected by the crisis. Unlike Spain, Italy had not been characterised by an over-expansion in either construction or private sector indebtedness.
So why Italy? The market’s new front might well have been Spain, whose underlying problems are by no means less serious. But if Italy has been chosen as the target, it is probably because of the recent intensification of belligerence within prime minister Silvio Berlusconi’s government.
In the longer run, however, Italy’s economy is biggest problem is chronically low productivity and competition. Only the removal of these impediments to growth can make a difference. When the worst of this week’s turbulence is passed, ensuring these are tackled is Italy’s next big challenge. Continue reading »