By Covering Business
November 29, 2012
By Sameepa Shetty
Columbia Journalism School C’13
Besieged with economic and political problems, Italy received a comforting signal from across the Atlantic with the re-election of Barack Obama. As the nation wrestles with Germany over what it can spend to grow its economy, Obama’s re-election puts Italy in a stronger position to push an agenda of more growth and less austerity.
After the election, Mario Monti, Italy’s prime minister and an advocate of pro-growth policy, hinted that the Obama would help advance his own policy approach. “With your confirmation in the White House, Italy knows that it can count on a strong, supportive America,” Monti said to Obama in a congratulatory message.
The Obama administration supports a fast, unified solution to Europe’s debt problems — one with the flexibility to spend. At the G-20 meeting in June, US Treasury Secretary Timothy Geithner called for a new plan that would let members of the European Union “stand behind their banks” and “provide capital to the banks that need it.”
Italy supports aggressive initiatives to restore healthy banking throughout Europe. These initiatives include establishing a unified banking regulator, direct liquidity for struggling EU banks and a multinational guarantee for depositors. Obama’s victory gives Italy some political capital in advancing these initiatives and fending off Germany’s push for a resolution that relies more on austerity than spending and unification.
Italian traders appeared to frown on Obama’s return to office. The FTSE MIB, Italy’s benchmark stock index, fell 2% the day after the American election. In the fixed income markets, the price of a ten-year credit default swap, which provides protection against an Italian default, rose 2.4%, underscoring the difference between investor sentiment and the broader political will.
Italy’s debt crisis poses a threat to the euro. As Europe’s third-largest economy, the nation’s health is critical to Europe’s recovery, but its debt is a weight on the broader region. In absolute terms, Italy is more indebted than any country in Europe. Its balance makes up 20% of the EU’s total debt.
Although there is a loud debate underway over how to solve Italy’s debt problem, there is little doubt that the Italian economy is at a standstill. Gross domestic product has contracted since the second half of 2011. In September, the unemployment rate reached 10.6%, the highest among the major EU countries. Italy’s debt-to-GDP ratio is about 126%. (It is second only to Greece, which has a debt-to-GDP ratio of 170%.)
Italy’s financial problems start with its weak banking sector. Bad loans account for 10.7% of borrowing, the highest of any European nation besides Greece and Ireland. With credit tight, industrial production, investments, consumption and competitiveness have all fallen since the second half of 2011.
When Monti took office in November 2011, he said “equity and growth” would be cornerstones of his government. He reinstated property taxes, repealed the tax amnesty for revenues brought in Italy, taxed cigarettes and gas and advanced policy to fight tax evasion. He also scaled back some retirement benefits.
Italy’s standing in global credit markets has improved under Monti. Four months into his administration, the yield on the 10-year Italian bond had fallen by more than two percentage points.
Monti’s critics say he hasn’t implemented economic changes that will put Italy back on the path to growth. Bills like “Grow Italy,” which is designed to reform labor market, still face legislative obstacles.
The Obama administration has faced similar problems, struggling to defuse the tension between an older workforce with more protections and entitlements and a younger population with more skills and fewer opportunities.
The biggest economic risk facing Italy may have less to do with America’s elections than its own, which are scheduled for next April. Opinion polls suggest that if elections were to be held now, the Democratic Party, which supports Monti’s pro-growth initiatives, would win. However, the candidates vying to lead a Democratic coalition agree that taxes should be lowered, labor markets reformed, and Fiat persuaded to expand production in Italy.
Speaking at a banking conference in Rome on October 31, Italy’s central bank governor, Ignazio Visco, warned that no matter who forms the next election, “budget targets must be respected and reforms implemented.” That would leave Italy facing some tough belt-tightening, regardless of who occupies the White House.
This article was written for the Columbia Journalism School’s seminar on business journalism in the fall of 2012.