July 2, 2012
BY ARMENUHI BUDAGHYAN (HEAD OF EXTERNAL RELATIONS COMMITTEE OF AEGEE-YEREVAN, MBA DEPARTMENT STUDENT AT AMERICAN UNIVERSITY OF ARMENIA)
The Maastricht Treaty which is known as the Treaty on European Union was signed on 7 February 1992 by the 12 member countries of the European Community in Maastricht, Netherlands. It led mainly to the creation of euro and established the Maastricht criteria. It suggests that there is EU single market that allows the free movement of goods, capital, people and services. There are 4 main criteria which must be met for countries that have signed the Maastricht treaty. They concern the following topics: Inflation rates, Government finance (which includes annual government deficit and government debt), Exchange rate and Long-term interest rates. The aim of these criteria is to maintain the price stability within the Eurozone. By the 1990s, in order to be able to enter the European Monetary Union and later to enter the Eurozone Italy had to make a lot of changes in its economy to meet the above mentioned criteria. Firstly in order to meet the second criteria regarding the internal debt it had to fight to lower the internal and external debt and reduce governmental spending. One of the biggest problems of Italy was tax evasion and its “black market” business which is 25% of Italy’s GDP. The other problem country still has is the difference between the wealth of Northern and Southern Italy. Despite many other European countries Italy is mainly famous for its small and middle-sized family owned businesses and industries and it does not have a lot of big companies. These small to middle-sized companies are mainly concentrated in the Northern part of Italy. This brings to one of the biggest problems of the country as per company there are on average 3.6 employees while in other countries of EU this number is 15. So though Italy did everything in order to be able to meet the Maastricht treaty criteria but the country’s economy growth is still stagnant. Its average is 1.23% while average of EUmember countries is 2.28%.
The high rate of Italy’s unemployment is because of low demand in retail goods. Retail outfits are reducing workloads and many are closing the door all together. When the demand for many outfits is going down firms have to reduce the price and the quantity which brings to reduction of workforce. They have two choices to reduce the workers or wages.
High unemployment is also because of the big economic gap between South and North of Italy. Unemployment is mainly high in the South, and this also brings to large presence of criminal and informal economy in Italy. Because of such problem unemployment has always been high in Italy even during the period of economic growth. Although the formal unemployment in reality is high, there are many people who work in informal sector. So these difficult living conditions and little work opportunities in south have brought to high emigration mainly among the youth. The government has tried to reduce it by tax breaks in order to encourage companies to set up business and to make new workplaces in South but it did not help too much. Currently the unemployment rate among youth aged 15 to 24 is 30%. One of the problems is also the huge wage differences. For example the 945 members of the Senate and the Chamber of Deputies earn an average annual salary of €140,000 which is almost twice as much as British MPs.
Today more than 90 of Italy’s 104 officially recognised clusters which are the bases of the country’s economy are in difficulty. As Michael Porter, who is a specialist of competitive advantage, says that cluster is a good way to remain competitive as the firms group in one place which can help them to reduce many costs and be more creative and innovative. Clusters in fact were considered a good way for Italian firms to survive and develop. Unfortunately many of them did not. The problem was high global competition and new technologies. Some firms were too small or ill-equipped to look beyond Italy’s borders. Some suppliers found themselves without work when their clients turned to lower-cost manufacturers abroad. Not many companies were able to survive the competition as they had rivals as China. They were not able to compete with such low costs. Open trade and improved transport links brings to the inefficiency of clusters. Many firms are currently changing their strategies and trying to be more competitive but not many of them are able to survive. So many of them close which also brings to the growth of unemployment as thousands of people lose their jobs.
As we can see one of worlds biggest economies had a very poor economic growth under Berlusconi governments. It announced the third worst economic growth over the past ten years. Overall country was in very bad economic and political condition. Its GDP is the third highest in the developed world and it has a negative per capital GDP growth. In fact during Berlusconi’s governance nothing changed for better in Italy’s economy and he did not make any active steps to change the conditions. So finally it was brought to a state were Italy’s debt was the second highest after Greece among countries of Euro zone. Berlusconi was forced to make some reforms. The poor state of the economy was the result of the large public sector debt, complex tax system, low productivity growth, high public sector deficit; rigid labour market and generous pension system. The main changes Silvio Berlusconi administration has made are by 2002 abolition of an inheritance tax. Tax cuts for low and middle-income households were made and also the corporate tax rates were reduced. He also tried to make the work contracts easier in order to increase employment. Pension reform which was called a “financial time bomb” by economists resulted in strikes in parts of Italy. But overall the economy did not change for better and the latest reform was offered by Berlusconi on 26 October. He introduced his letter to EU by which he announced about the intention to adopt reforms within the next year aimed at abolishing provincial administrations, reducing the number of parliamentarians, and increasing market freedom and fair competition. He mentioned about reforms in tax system to abolish tax break by the end of 2012. It would have brought to savings of €4bn in 2012, €16bn in 2013 and €20bn a year from 2014. Another new rule is to enable the dismissal of workers on permanent contracts. Also Italy’s retirement age was announced to be changed 67 instead of 65 by 2026.
These reforms were viewed well from the side of Euro Community as a step towards changing the bad condition in the country but Italians accepted it with scepticism and dissatisfaction. There is a hard political and economical condition in the country and the opposition is claiming Berlusconi to resign.
Currently Italy is not a good place for foreign investment; it is not even included in top 15 countries that are attractive for FDI. All the above mentioned problems are a reason that not many investors would be interested in investing in such an economy. Here is a graph showing the differences of foreign direct investment in US, China, France, Spain and Italy. We can see a huge difference between them and that Italy is the least attractive for FDI among them.
References and external links
* Board of International Politics WG would like to thank Armenuhi for this wonderful initiative and express the hope that this would not be her last article on our blog.
Author : ipwg