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Strong recovery blocked by debt levels, political worries
In the latest positive indicator for the Italian economy, the country's industrial production levels inched higher for the second consecutive month in June, though economists say it will be difficult for Italy's economic malaise to weaken substantially until debt levels begin to drop and the political situation stabilizes.
According to ISTAT, Italy's National Statistics Institute, industrial production was 0.3 percent higher in June than compared to May. That follows a 0.1 percent rise in May, the country's first back-t-back increases in more than a year.
That follows on the tail of improving consumer confidence, and predictions from Fabrizio Saccomanni, Italy's Economy Minister, that growth would turn positive by the end of this year. ISTAT reported Tuesday that Italy's economy contracted 0.2 percent in the second quarter of the year -- and 2.0 percent over the first half of the year.
"There are positive signs here and there, and that's certainly better than the alternative," said Marcello Cucinella, an Italian born macro-economist with the University of Amsterdam, "But it would be very easy for debt levels or a political crisis to throw this very tentative recovery off its tracks."
For nearly two years -- starting with the technocrat government of former Euroepan Commissioner Mario Monti that took power in November 2011, and continuing through the current Enciro Letta government, in power since April -- Italy has concentrated on paying down debt, though cost cutting, increasing taxes, and fighting tax evasion.
Those efforts have helped stabilize yields for Italian government bonds by assuaging investor fears that Italy might eventually be forced to default on its debt payments. But debt levels continue to rise, now totaling an estimated 127.6 percent of the country's gross domestic product, according to ISTAT. The official figure for the end of last year was debt totaling 127.0 percent of Italy's GDP, its highest level since 1924, when the country's debt was worth 142.1 percent of GDP as the pre-war government borrowed massive amounts of capital to fund wide-scale public works projects.
The debt-to-GDP ration was 120.7 percent at the end of 2011 and 117.2 percent at the end of 2010. In the European Union, only Greece has more public debt as a percentage of GDP than Italy does. In nominal and real terms the debt level actually shrank between the end of 2011 and the end of 2012 (1.589 trillion euros compared to 1.565 trillion euros), though its value as a percentage of GDP rose because the economy shrank.
Even with the more stable bond markets, investor jitters could return quickly from the perception that Italy is failing to get its debt levels under control, according to Cucinella.
"If you get two or three big banks saying they are again worried about the debt levels staying high, the fear would spread," he said.
Political instability is another worry. The Letta government has been on unstable ground since it came into power after a two-month political stalemate, and its coalition, which features elements from across the political spectrum, has been at odds from the start.
The stakes were raised last week when three-time Prime Minister Silvio Berlusconi, a billionaire media tycoon, was sentenced to a year of house arrest in connection with a 300-million-euro false accounting and tax evasion conviction. Though a five-year political ban was tabled (it will be "reconsidered" by a lower court), allowing Berlusconi to remain involved in politics, it is likely his influence would wane. And any splintering of his collation, the second largest in the Letta government, could make the government collapse.
