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Elections in Italy – Bella Italia, Wake Up!

Italy will choose a new Parliament in March. What do the Italian elections mean for investors? What about the banks in Italy? Find out why the Italian economy is not making any headway and why this will hardly change after the elections.

Italians go to the polls on March 4. But unlike last year, the parliamentary elections seem to elicit little more than a yawn from the markets. One positive note is that the populist Five Star movement is no longer calling for Italy to leave the currency union. But this is probably the only item on the very short list of hopeful developments.

Despite Italy’s systematic decline in European comparison, every political platform reads like a continuation of the reform stalemate. Over the last 20 years, Italy’s growth rate has averaged a meager 0.4%. This is lower than any other comparable European nation.

But instead of reforms, the government is playing the debt card: around the world, only Japan, Greece and Lebanon have higher debt. And as if that were not enough, for ostensibly “macro-prudential reasons,” Italian financial institutions and pension schemes have been compelled to purchase this public debt for years – quale pericoloso collegamento! The humbled nation did not even qualify for the 2018 world soccer championship. Whatever next?


Banks in Italy Benefiting from Turn Away from Abandoning the Euro

Despite the “relief rally” in Italian bank shares after political distancing from the proposal to abandon the euro, Italy’s structural deficits have continued their systematic deterioration. The country report from the World Economic Forum report lays the bare facts on the table. In a comparison of 30 advanced economies, Italy – which remains the third largest economy in the euro zone – has now plummeted to 27th place. Only Portugal and Greece are further down the rankings. Ten of the 12 criteria contributed to this result.

Italy’s Systematic Decline

National Key Indicators

Value

Rank Trend

1) Growth & Development (1–7)

4.24

23 / 30

-1.6%

       - GDP per capita (USD)

33,705

21 / 30

-1.2%

       - Labor productivity (USD)

87,013

12 / 30

-0.6%

       - Healthy life expectancy (years)

72.8

5 / 30

+1.1%

       - Employment (%)

43.1%

29 / 30

-1.1%

2) Inclusion 1–7 (best value)

4.36

21 / 30

-7.1%

       - Income inequality (Gini coefficient)

32.7

21 / 30

+0.2

       - Poverty rate (%)

13.3%

21 / 30

+1.3%

       - Wealth inequality (Gini)

68.7

9 / 30

+3.5

       - Median income (USD/day/PPP) /capita

34.1

19 / 30

-3

3) Intergenerational equity 1–7 (best value)

3.94

28 / 30

-5.7

       - Savings as a percentage of national income

3.7%

26 / 30

+0.2

       - Carbon intensity (KtCO2/USD bn GDP)

24

28 / 30

-4.8

       - Public debt as a percentage of GDP

133%

28 / 30

+16.2

       - Dependency ratio (as percentage of workforce)

56.5%

25 / 30

+3.2%

Overall Ranking 1–7 (best value)

4.18

27 / 30

-4.9%

Source: World Economic Forum (The entire country report).

Three interconnected aspects have contributed to the country’s misery: the huge North–South divide, the neglect of Italy’s youth and its education, and the weakness of the state apparatus.

In Italy, a Lack of Tax Receipts Is a Big Concern for the Economy

Italy’s public sector is one thing above all: inefficient. One key example: because the tax collection process functions poorly, it is primarily companies – and just a few private households – that pay taxes. Small and mid-sized companies are hit hardest. In good years, they may have to hand over nearly two-thirds of their profits as taxes and fees. In bad years, it is difficult for them to reduce costs due to long notice periods.

As for the value-added tax, which can normally be collected quite efficiently, the Guardia di Finanza estimates that it only receives around 35% (!) of the VAT actually owed – thus the state loses 65% of VAT revenue. If Italy could lower this efficiency loss merely to the OECD average of 30%, it would automatically produce EUR 45 billion in additional revenue – enough to provide all Italian banks with adequate capital.

Italian Elections Will Not Bring Any Reforms

One should never give up hope. However, I must confess, that my expectations for Italy are low. Reforms require a clear program and political will, but for the time being, there is no sign of either. This is why our investment strategy currently avoids Italian investments. What a pity.