Economy of Italy

The Italian economy has changed dramatically since the end of World War II. From an agriculturally based economy, it has developed into an industrial country ranked as the world's fifth-largest economy in USD exchange-rate terms and seventh largest in terms of purchasing power parity (PPP). Italy belongs to the Group of Eight (G-8) industrialised nations; it is a member of the European Union and the OECD.

Italy has few natural resources. With much of the land unsuited for farming, it is a net food importer. There are no substantial deposits of iron, coal, or oil. Proven natural gas reserves, mainly in the Po Valley and offshore Adriatic, have grown in recent years and constitute the country's most important mineral resource. Most raw materials needed for manufacturing and more than 80% of the country's energy sources are imported. Italy's economic strength is in the processing and the manufacturing of goods, primarily in small and medium-sized family-owned firms. Its major industries are precision machinery, motor vehicles, chemicals, pharmaceuticals, electric goods, and fashion and clothing.

Italy entered an economic crisis in 2004, with GDP growth at about zero, although GDP has started to grow again as of 2005. Previously, Italy's economy had accelerated from 0.7% growth in 1996 to 1.4% in 1999 and continued to rise to about 2.9o% in 2000, which was closer to the EU projected growth rate of 3.10%. Domestic demand and exports were the dominant factors in GDP growth, but it nevertheless remains one of the lowest among industrialised countries. Since 2002, growth has gradually slowed, reaching recession conditions. The opposition blamed Silvio Berlusconi's government for incompetence, especially the minister of economy Giulio Tremonti. A report of the Economist, entitled Addio, dolce vita ("Farewell, sweet life") parallels current status of Italian economy to that of the Republic of Venice in 1797, a country with "many attractions" but living "a slow, long decline". The administration of the public finances is defined there as "terrific", and Italy is called "the real sick man of Europe". The government's stance has been to blame the difficulties on the international situation, especially on the September 11, 2001 Attacks.

Italy has been less successful in terms of developing world class multinational corporations. Instead, the country's main economic strength has been its large base of small and medium size companies. These companies typically manufacture products that are technologically moderately advanced and therefore increasingly face crushing competition from China and other emerging Asian economies. Meanwhile, a base of corporations able to compete in markets for advanced goods and services is underdeveloped or lacking entirely. It is not obvious how Italy will overcome this significant structural weakness in the short run, and Italy has therefore been referred to as the new "sick man of Europe".

Import growth continues to outpace export growth, resulting in a trade deficit in 2000 of $1.3 billion, down from $14 billion in 1999 and $60 billion in 1996.

With respect to inflation of forms, Italy is now firmly within norms specified for Economic and Monetary Union (EMU), a major achievement for this historically inflation-prone country. Consumer inflation fell from 3.9% in 1996 to 1.7% in 1999 but did rise again to 2.5% in 2000. The 1992 agreement on wage adjustments, which has helped keep wage pressures on inflation low, remains in effect. Tight monetary policy by the Bank of Italy also has helped bring inflation expectations down. Since 1999, a combination of the introduction of the euro and a house price boom are blamed for a rate of inflation estimated by academics as at least 15%, although officially it is around 2.5%. Most Italians maintain that with the euro, prices doubled overnight. This was not due to the new currency in itself (widely reviled especially from the political right, since it was Romano Prodi, the center-left's leader, who headed UE's efforts in that direction), but to massive dishonesty on part of the pricemakers and resellers, in damage of fixed wage perceivers and pensioners. This has furthermore widened an already worrying division of Italian society, heading towards the "haves vs. have nots" model.

Since 1992, economic policy in Italy has focused primarily on reducing government budget deficits and reining in the national debt. Successive Italian governments have adopted annual austerity budgets with cutbacks in spending, as well as new revenue raising measures. Italy has enjoyed a primary budget surplus, net of interest payments, for the last 7 years. The deficit in public administration declined to 1.4% of GDP in 2000, down from 7% in 1995. Italy joined the Economic and Monetary Union in May 1998. The national debt, which stood at roughly 124% of GDP in 1995, declined steadily until about 2002, but is raising again because of slow growth. The deficit-to-GDP ratio is likely going to be higher than the EU limit of 3.0% in 2005, and estimates of up to 5.1% have appeared.

Italy's closest trade ties are with the other countries of the European Union, with whom it conducts about 59% of its total trade. Italy's largest EU trade partners, in order of market share, are Germany (19%), France (13%), and the Netherlands (6%).