End Of The Excessive Deficit Procedure - Italy In Intensive Care Therapy

Includes: EWI
by: Alberto Abaterusso

The EU proposes the closure of the procedure for excessive deficit against Italy and the draft document with the EU's "recommendations", approved by the European Commission, reveals that Italy must:

  1. Ensure that the deficit remains below 3% in 2013;
  2. Pursue structural adjustment at an appropriate pace and through a stabilization in support of growth in order to achieve medium-term targets in 2014; and
  3. Fulfill expected primary surpluses to bring down the high debt.

Growth failure is one of the biggest worries in Italy. According to Corte dei Conti (Italian Court of Auditors) Italy has lost $230 billion (thousand million) in 5 years because of the lack of growth.

The EU also recommends for Italy the following priorities on the reform agenda and to continue with the spending review in order to improve the efficiency and effectiveness of the state machine in the management of public expenditure:

a) Make the public administration more efficient;

b) Make the civil justice more streamlined, fast and efficient through the simplification of the regulatory framework for citizens and businesses by limiting the duration of trials, through the reduction in the number of cases, the promotion of procedures for the extra-trial agreement and the revision of the rules that govern the periods of prescription;

c) Improve the access to credit for businesses. According to the OECD the access to credit for Italian companies is difficult and costly because the banks "are weakened by increasing levels of non-performing loans." The weakness of the institutions remains "despite the rebound in market prices of sovereign debt in 2012, which strengthened the balance sheets of banks";

d) Fight against youth and female unemployment by strengthening vocational education and training and the improvement of public employment services. In Italy, according to the OECD, 21.5% of men under the age of 25 are out of work, and out of education and training, and among those, about 11% are discouraged, disillusioned and not even trying to look for a job because they think there isn't any work.;

e) Review the areas of application of VAT exemptions to move taxes from labour and capital to consumption; and

f) Reform of the cadastral system to match the data with market values.

The Italian Prime Minister, Enrico Letta, expressed his satisfaction with the withdrawal of the excessive deficit procedure and gives the Italians the credit for this result.

Can this result finally enshrine the end of sacrifices for Italian families and businesses? Well, it seems not, and we have to wait at least another 12 months to start a real economic recovery. At least these are the feelings that emerge from the studies that have been conducted by local institutions and international institutes for economic researches and statistics.

According to Corte dei Conti the emergency is represented by the growth and unemployment. The exorbitant rigor with which the policy of austerity to Italy was pursued is the cause of the recession in Italy and the permanent loss of production has resulted in a fall in tax revenue but not in a reduction in the tax burden. The reduction in the tax burden is an objective "not easy to combine with the respect of European targets," said the President of the Court of Auditors. The rising level of the stock of public debt does not allow Italy to make a less strict interpretation of the path of rebalancing accounts that has been outlined by the EU and that Italy should continue to follow'', booms the Corte dei Conti. The OECD estimates for Italy a debt to GDP ratio of 3% for this year and 2.3% for next year (debt not calculated according to the Maastricht definition). Indeed, the OECD says that to get out of the crisis Italy has to "consolidate the positive reforms for growth," and "avoid premature reduction of taxes."

In other words Italians should not expect a reduction of the tax burden. Likely the taxes and contributions in Italy, which are already really consistent and certainly above the average in the euro area, are destined to remain like this, also in the coming months.

In the fall, as a result, are the estimates of the data on the Italian GDP, which rose from -1.5% to -1.8% for 2013, and from +0.5% to +0.4% for 2014. Therefore a slight recovery in 2014 is expected, but this will be still too slow to recover the lost ground.

To act as a premonition is the latest information on orders from Italian companies. The decline in orders (balance of judgments from -43 to -46) anticipates a negative trend in activity in the coming months. According to the entrepreneurs, domestic demand is getting worse (-50 to -48) compared to a marginal improvement in foreign demand. According to Cer-Rete Imprese, this is one of the worst recessions that we have ever seen.

The ones who are suffering from this situation are the Italian families and especially those who spend less i.e. the poorest ones.

Small and medium-sized enterprises, those which employ 60% of the Italians are tight in a vice because on one hand they are waiting for payments from the Government for goods already sold and services provided to the public administration and on the other hand they cannot access to credit because banks fear they will not get back loans once granted.

Many of these companies have already ceased and according to Cerved's data in the first quarter of 2013, business bankruptcies have reached a new level with 3,500 procedures, which is 12% more compared to the same period in 2012.

In short, the EU has reinstated Italy between the virtuous countries of the euro zone, but we don't see the light at the end of the tunnel yet and with the uncertainty caused by the crisis, the number of Italians who decide to consult sorcerers and fortune-tellers is increasing. Maybe this is the new catalyst of the Italian economic recovery?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.