Structural problems and underperforming economy the biggest threat to Italy


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The Italian banking sector suffered a spanking in the European Banking Authority’s stress tests last week, but the banking system is not the only issue for the sovereign. Italy’s risk score could drop further this year if the government does not gain a mandate to carry out much-needed reforms.

By Claudia De Meulemeester

Matteo Renzi painting-R-600
War paint: PM Matteo Renzi is at the forefront of the battle to 'save' Italy

Italy fell one position to 41st in Euromoney’s global risk table after the second-quarter round of voting from ECR experts.

Italy’s bank stability and economic GNP scores slipped slightly to 5.3 and 3.7, respectively, from 5.4 and 3.8 in the previous quarter.

Risk scores are likely to drop further if prime minister Matteo Renzi loses a constitutional referendum in October. His proposal to reduce the number of senators and their power to bring down governments has been heavily criticized by the opposition.

Renzi is also trying to push through much-needed labour market reforms. Italy’s structural assessment has been in decline all year. The implementation of flexible labour reforms is fundamental to getting the country back on track and restore confidence in investors.

An ageing population, the North-South divide, low female employment and rigid labour markets are big issues for Italy, argues Riccardo Fiorito, former professor of economics at the University of Siena and now a macroeconomic policy adviser.

ECR Italy

Still, Italian labour unions have severely criticized many attempts to reform the system as they feel it might threaten their working rights.

“You can hire more people because you can also fire them,” is essentially the core flexibility issue according to Fiorito.

Although Italy is finally recovering from a recession, a long-term optimistic view is hard to support. Youth unemployment is at almost 37%.

“The growth will be modest and slow; no one expects a strong increase,” continues Fiorito.

Italy’s government stability score is down to 4.8, the lowest in a year, and could be a burden for foreign investments that require long-term horizons.

The rise of populist and Eurosceptic parties around Europe does not leave Italy untouched – adversely affecting Renzi’s ability to implement a reform-driven agenda. The Five-Star Movement founded by Italian comedian Beppe Grillo in 2009 came second in the general elections of 2013.

“The Five-Star Movement will most likely have a great influence on the election,” says Stein Gjerding, chief economist at Norwegian non-governmental organization Arbeidsgiverforeningen Spekter. “Anti-establishment and anti-EU are easy answers to economic challenges.”

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.