Exploring The Economy Of Italy Economics Essay

According to the International Monetary Fund, in 2008 Italy was the seventh-largest economy in the world and the fourth-largest in Europe. Italy is member of the Group of Eight (G8) industrialized nations, the European Union and the OECD. According to the World Bank, Italy has high levels of freedom for investments, business and trade. Italy is a developed country, and, according to The Economist, has the world’s 8th highest quality of life. The country enjoys a very high standard of living, and is the world’s 18th most developed country, surpassing the Germany, UK and Greece. According to the last EuroHYPERLINK “http://en.wikipedia.org/wiki/Eurostat” stat data, Italian per capita GDP at purchasing power parity remains approximately equal to the EU average. On addition to that, Italy has the world’s 4th (3rd excluding the IMF) largest gold reserves, that of 2,451.8 tonnes, coming after the USA and Germany, and surpassing France and China. The country is also well-known for its influential and innovative business economic sector, an industrious and competitive agricultural sector, and for its creative and high-quality automobile, industrial, appliance and fashion design.

Despite this, the country’s economy suffers from many problems. After a strong GDP growth of +8% from 1964 onwards, the last decade’s average annual growth rate lagged with 1.23% in comparison to an average EU annual growth rate of 2.28%. In addition, Italian living standards have a considerable north-south divide. The average GDP per capita in Northern Italy can far exceed the EU average (an example of this could be the Province of Bolzano-Bozen, with a 2006 average GDP per capita of €32,900 (US$ 43,861), which is 135.5% of EU average whilst some regions and provinces in Southern Italy can be considerably below the EU average. Italy has often been referred the sick man of Europe, characterised by economic stagnation, political instability and problems in pursuing reform programs.

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Italy GDP Growth

The Gross Domestic Product (GDP) in Italy contracted at an annual rate of 0.30 percent in the last quarter. Italy Gross Domestic Product is worth 2293 billion dollars or 3.70% of the world economy, according to the World Bank. Italy is a member of the G8 group of leading industrialized countries. Italy has a diversified industrial economy, which is divided into a developed industrial north, dominated by private companies, and a less-developed, welfare-dependent, agricultural south, with high unemployment. The Italian economy is driven in large part by the manufacture of high-quality consumer goods produced by small and medium-sized enterprises.

Interest Rate

Italy is a member of the European Union. the Euro Area benchmark interest rate stands at 1.00 percent. In the Euro Area, interest rate decisions are taken by the Governing Council of the European Central Bank. The primary objective of the ECB’s monetary policy is to maintain price stability. The ECB’s Governing Council has defined price stability as “a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for The Euro Area of below 2%. The European Central Bank is the sole issuer of banknotes and bank reserves. That means it has the monopoly supplier of the monetary base. By virtue of this monopoly, it can set the conditions at which banks borrow from the Central Bank. Therefore it can also influence the conditions at which banks trade with each other in the money market. In the short run, a change in money market interest rates induced by the Central Bank sets in motion a number of mechanisms and actions by economic agents. Ultimately the change will influence developments in economic variables such as output or prices

Currency of Italy

The euro is the official currency of Italy, which is a member of the European Union. The Euro Area refers to a currency union among the European Union member states that have adopted the euro as their sole official currency.

Inflation Rate

The inflation rate in Italy was 1.40 percent in March of 2010. Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well known measures of Inflation are the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy.

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Current Account

Italy reported a current account deficit equivalent to 4990.0 Million EUR in February of 2010. Italy’s major exports are food, clothing, precision machinery, motor vehicles, chemicals and electric goods. Italy imports mainly engineering products, chemicals, transport equipment, energy products, minerals, textiles and clothing; automobiles, electronics, food, beverages and tobacco. Italy’s closest trade ties are with the other countries of the European Union, with whom it conducts about 59% of its total trade. Italy’s largest EU trade partners are Germany and France

Balance of Payments

A Balance of payments is an accounting record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country’s exports and imports of goods, services, and financial capital, as well as financial transfers. The BOP summarises international transactions for a specific period, usually a year, and is prepared in a single currency, typically the domestic currency for the country concerned. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as a negative or deficit item.

Current Account balance

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Year

Current Account Balance

Rank

Percent Change

2004

(16487200000)

146

 

2005

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2006

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2007

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(17560200000)

156

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2008

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(57742200000)

187

52.91 %

The Current Account deficit reflects an increase in the goods deficit, which climbed from EUR 16 billion to EUR 57 billion as a result of deterioration in the trade in cars and intermediate goods. This improvement stems from a slight increase in the travel and transport balances. The travel surplus reached nearly EUR 13 billion, close to the record surplus of EUR 14 billion recorded in 2004. Conversely, the surplus on “other services” posted a slight decrease, totalling EUR 1.3 billion.

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Goods

In 2007, the Goods balance still posted a deficit, amounting to EUR 39.7 billion, compared with EUR 29.4 billion in 2006. The customs trade deficit in fob-fob terms increased further to EUR 10.6 billion. Contrary to what had been recorded the previous year, this deterioration is not attributable to the energy trade deficit. The latter actually declined by around EUR 1 billion as a result of a slight drop in average oil prices and a reduction in imported volumes. The customs trade deficit excluding energy worsened mainly on account of a deterioration of the trade balance in cars (EUR 4.4 billion) and intermediate goods (EUR 4.3 billion).

Services

After having been on a downward trend since the start of the decade, the Services trade surplus increased by EUR 1.1 billion to stand at EUR 11 billion in 2007. This improvement results from a EUR 0.9 billion decline in the transport trade deficit and a EUR 0.7 billion rise in the travel surplus, despite a EUR 0.5 billion decrease in the surplus on other services.

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Income

In 2007, the income surplus stood at EUR 28.5 billion, down by EUR 0.3 billion on 2006, when it had increased by EUR 8.6 billion. Expenditure and receipts posted a strong rise (23.0% and 18.5% respectively). This surplus reflects the traditional surplus on direct investment income combined with the surplus on the compensation of employees. In 2007, portfolio investment income registered a surplus, after having shown a deficit for the past five years. This improvement stems from a significant rise in receipts. Conversely, the deficit on other investment income continued to widen.

Trade in Italy

Italy trade is dominated by automobiles and machineries. As the country is challenged by mountainous land, cultivation is not possible. Based on the same reason, the Italian trade depends on mostly on the manufacturing sector. World over, Italy’s famous brands such as Armani, Valentino, Versace, Benetton, Prada, FIAT, Lancia, Alfa Romeo, Maserati and Lamborghini have already created their niche in the global trade scene.

Exports

Recession decreases the global trade volume significantly and Italy was no exception. Its exports volume decreased from $546.9 billion (2008) to $369 billion in 2009. However, even with such a huge decline, the country remained relatively stronger and ranked 6th in the world in terms of the exports volume. Exports include mechanical products, textiles and apparel, transportation equipment, metal products, chemical products, food and agricultural products.

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Year

Exports

Rank

Percent Change

2003

191808000000

8

 

2004

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205794000000

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248936000000

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6

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2009

191808000000

6

8.86 %

Imports

The imports dipped as well with the recession marred years. The figures dropped from 368.5 billion of 2008 to 176.2 billion in 2009. The country again ranked 7th in terms of imports volumes. Imports include machinery and transport equipment, foodstuffs, ferrous and nonferrous metals, wool, cotton, energy products.

Year

Imports

Rank

Percent Change

2003

176268000000

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7

 

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9.80 %

Reserves

Year

Reserves of foreign exchange and gold

Rank

Percent Change

2004

46812400000

13

 

2005

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45510000000

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52170000000

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14

6.90 %

2008

69804200000

14

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2009

77922000000

13

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The Euro value for the stock of all financial assets that are available to the central monetary authority for use in meeting a country’s balance of payments needs as of the end-date of the period specified. This category includes not only foreign currency and gold, but also a country’s holdings of Special Drawing Rights in the International Monetary Fund, and its reserve position in the Fund. Italy is Ranked 13th in terms of having the Reserves.

Financial Account

 

Direct

Portfolio

2003

63197.3

19262

2004

80538.1

30008

2005

80394.2

34000

2006

83654.4

60220

2007

79924.2

85880

2008

93591.1

121099

In the recent years the investment in Italy is found to be increasing day by day. But in the recent years the FDI has been decreased drastically. It is due to the recession in the whole world. As a member of the EU, Italy is very active in European trade, and is part of the EU’s single market. Italy is a major trade partner of most European countries, as well as the US and much of Asia. The ongoing international merger and acquisition activity has led to an intensification of cross-border relations between affiliated companies regarding both Italy investment abroad and foreign investment in Italy. Italy net direct investment position stood at EUR 566 billion, up by EUR 44 billion in year-on-year terms. Assets and liabilities were up by EUR 159 billion and EUR 115 billion respectively. The scale of these changes are in line with observed transaction flows, reflecting the fact that the increase in the prices of shares and other equity offset the euro exchange rate effects.

In 2008, portfolio investment net outflows stood at EUR 121.09 billion, compared with EUR 85.8 billion in 2007. This swing is attributable to the sale of EUR 16.5 billion worth of foreign equities by residents (after having been net buyers in 2006) on the one hand, and the sale of EUR 61.3 billion worth Italian equities by non-residents (also net buyers in 2006).. As regards the other financial instruments, net outflows totalled EUR 87.1 billion, compared with EUR 74.1 billion in 2006. By type of instrument, outflows on mutual fund shares were significantly higher than in 2006: EUR 59.7 billion as against EUR 4.2 billion. Conversely, outflows on debt securities with maturities of over one year and money market instruments recorded a decrease, falling to EUR 22.1 billion and EUR 5.3 billion from EUR 60.2 billion and EUR9.6 billion respectively

Reasons For the Swings in the results

The Italian tax system does not discriminate between foreign and domestic investors. The 2008 budget reformed the structure of the tax system, reducing corporate income tax (IRES) rates by 5.5 nominal points from 33 to 27.5 percent, and trimming the regional business tax (IRAP) from 4.35 to 3.9 percent. These tax cuts are in response to increased EU-wide competition for investment, particularly as the enlargement of the EU to 27 members ushered in various low cost, low tax East European states. Germany’s 2007 decision to cut corporate tax rates by ten basis points rendered Italy’s corporate tax rate the highest in the EU.

Italian Government took some initiative which were the key factors for the change.

Protection of Property Rights

Transparency of the Regulatory System

Efficient Capital Markets and Portfolio Investment

Foreign participation in Italian capital markets is not restricted. While foreign investors may obtain capital in local markets and have access to a variety of credit instruments, access to equity capital is difficult. Italy has a relatively underdeveloped capital market and businesses have a long standing preference for credit financing. What little venture capital exists is provided by established commercial banks and a handful of venture capital funds. “Angel investing” has only begun to take root in 2008, after a brief existence snuffed out at the start of the century by the dot.com bust. The Italian stock exchange (“Borsa Italiana”) is relatively small — fewer than 300 companies – and is an inadequate source of capital for most Italian firms. In 2007, the Borsa merged with the London Stock Exchange, raising expectations that governance standards and transparency of the Milan market would improve. Each of the partners will continue to be regulated by its respective national securities regulatory entity.

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