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Italy is Still a Pig

Heading in a better direction?

Four of the five piigs, Portugal, Ireland, Greece and Spain are beginning to recover from their economic woes.  That other pig, Italy, is lagging way behind the other porkers.

Whereas Portugal, Ireland, Greece and Spain have managed to increase productivity and decrease labor costs, Italy has managed neither.  Labor costs in Italy have increased.  This is not a healthy sign and does not bode at all well for the Boot’s speedy recovery.  Nor will it help attract overseas investors.

Adding to Italy’s woes is the extremely confusing state of politics.

Aside from Monti and his technocrats who are actually governing, the mainstream political parties are bickering as usual and gearing up for elections.  There are zero signs of any form of political rejuvenation, despite repeated requests from Italy’s President Napolitano for the main political parties to get their acts together.

Much needed electoral reforms for Italy have still not been agreed upon.

As well as Italy’s stuck in the mud political parties, the nation’s unions are not helping matters either, and Prime Minister Mario Monti recently appealed to them to be more constructive.  Good luck with that appeal Mr Monti, Italy’s unions are about as forward thinking as Italy’s mainstream politicians.  Not the most promising of situations for Italy’s future.

Still, despite all the gloom, inaction, and bickering, Italian automaker Fiat looks as if it will do better in 2012 than in 2011.

Italy’s own car market has contracted to levels of demand last seen some 40 years ago, so Fiat’s presence in markets other than Italy is helping matters.

Widespread uncertainly about the future will no doubt be convincing more than a few Italians to keep their cars for another couple of years, just in case they need the cash to cope with the unexpected, one suspects.

Still, what the Fiat forecast illustrates is that there is demand for Italian products outside of Italy. This should provide a ray of hope, if nothing else.

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Italy could, if it put its mind to it, export its way to recovery. Mario Monti knows this to be true too.

Inbound tourism is another area in which Italy could generate plenty of cash. If only the nation would adopt a more coordinated approach to the marketing of all Italy has to offer, which, believe me, is an awful lot.

The ongoing crack-down on tax evasion will also be having an effect on disposable incomes in Italy, as if Italians do pay all their dues, they will not have as much disposable income as they had before, at least those who have been under-declaring for decades will not have.  Hopefully, and if the crack-down continues, tax levels will eventually be cut.  Once this happens, spending levels will rise.

There is, however, the chance that after elections take place in 2013, the crack-down will be forgotten.  As a consequence, any hope of tax cuts will also fade quickly away too, but Italians will start spending more, safe in the knowledge that they can get away with evading taxes once again.

Tax evasion in Italy, which is three or four times higher than in the United Kingdom, for example, will have helped boost consumer spending in Italy, albeit artificially.  It is thus inevitable that, at least initially, the clamp down would lead to a fall in spending.

If tax cuts do happen, more people should have more disposable income and this should mean that the spending power of Italians will see an across-the-board increase.  Greater demand should be the result and this will help Italy’s economy grow.

The road towards recovery for Italy is still long and the time it takes for Italy to arrive at the end of the tunnel depends very much on whether the country ends up with a half-decent post-Monti government.

For now, no half-decent government is on the horizon.  As I mentioned the other day, Italy is desperately seeking new, competent, leadership.

Silvio Berlusconi could bounce back too.  If that happens, Italy can probably kiss goodbye to recovery forever.


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