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Italy, What A Strange Country!

Italy, with its 60 million people, might be one of the best performing and fast growing Country within the Euro Area thanks to its not-tackled potential rather than experiencing a 20 years stagnation if not a recession from the years of the financial crisis. Is indeed a story of continuous missed opportunities for structural reforms necessary to bring Italy back to its past competitive level and fast changing Governments with no vision, more interested to preserve their own positions and voters' consensus rather than reform Italy.

It would be misleading to consider the economic downturn Italy is facing as only the consequence of the 2008 financial crisis first and the Euro crisis then. The Italian declined started over 20 years ago and does not have to do with cyclical effects.

Thanks God, Italians have the undisputed ability to always get out from very difficult situations and this has to do with the single individual and his/her entrepreneurship, "commercial" skills and advanced problem solving skills developed by getting used to things that don't work in Italy. Is merit of our people, our visionary entrepreneurs that invest in research and development and open up their business to the global market if we were still able to compete in the business arena and make the "Made in Italy" something to be pride of.

I say is exclusively merit of individuals because Governments, both left-wing and right-wing ones, have been always very pervasive in the Italian economy representing more an obstacle for the growth rather than a facilitator, by increasing public spending and financing this increase with new taxes always higher, up to the unacceptably-high current levels. As a matter of fact from 2005 to 2012 taxation rose from 40% of GDP to 44% with respect to 41% of the Euro Area (Italy excluded).

Source: Banca d

In the last ten years, taxes rose rapidly in order to finance an out of control public spending, that significantly increased in the last 5 years. Furthermore it's worthwhile to say that was not the welfare component to skyrocket during the last five years (is indeed aligned with the average of the Euro Area) but the current government expenditures (interest on debt non included) such as procurements in the public health sector.

Source: Banca d

Source: Banca d

The depicted scenario suggests that Italy desperately needs structural reforms aimed to cut public spending, reduce bureaucracy and liberalize some sectors so then reduce the scope of the public intervention in the economy (i.e. the dismissal of important stakes the State has in big listed companies is very important for a significant reduction of the public debt and the related interests).

By the reduction of public spending and the Italian debt, a decrease in taxation levels both on individual and corporate incomes will be possible, resulting then in more disposable income for individuals that will start again to consume and more incentives for firms to invest so to grow and hire new people then.

Italy has a great potential for growth, it has the resources and the intellectual capital to do it, investors know it and are just waiting that these reforms will finally take place and will create the basis for the recovery of the national economy. As a matter of fact the FTSE MIB grew by 10% one year from now (€ 16.682,21 as per August 30, 2013) and the spread between the 10-years Government bond and the Bund fell to 254,05 from the dangerous level of 600 of 2 years ago.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.