The Economy of Italy


The existence of the Eurozone is nowadays hotly disputed not only by the international observers but by the European Union members as well. Currently, they are really perplexed whether the advantages outweigh the disadvantages of this economic union. One of the most important dramatic situations concerns Italy, which is still experiencing negative repercussions of the 2008-2010 global economic downturn.

The aim of this essay is to collect information about the financial performance of this country for the recent 20 years. The real exchange rate of the Italian currency, contemporary account balance, real gross domestic product (GDP), employment rates, government debt and government deficit over the latest 20 years have been chosen as the main criteria.

Whereas the first part of the paper is fully descriptive in its nature, the second part is completely confined to probable assumptions. The major elucidated assumption is the Italian exit from Eurozone. The potential consequences are analyzed. Specific attention is paid to the assumption if Italia’s decision to abandon Euro and adopt its own currency, Lira. Besides, the second chapter of the paper addresses the issues connected with the policies that can be elaborated by the financial authorities of Italy in order to increase export growth of the country. The finalizing paragraphs conclude on what exchange policies may be hypothetically followed to succeed in currency solidification and general enhancement of the Italian economic system.


Macroeconomic Analysis of the Italian Economy

Present economy profile of the country is not very optimistic in its nature, especially when it is compared with the tempos of economic growth that were speculated a decade ago.  Currently, international research agencies, as well as state financial authorities of Italy, unanimously report that the gross domestic product of the country is $ 2, 198 mln.  If to compare this indicator to the rest of the European economic communities, it can be inferentially concluded that Italy really lags behind the acknowledged European leaders, like France and Germany, but fortunately, it outscores Greece, Spain, and Portugal. This statistics is especially striking due to the fact that the industries of Greece, Spain, Portugal and Italy are almost identical in their natures. However, while Spain, Portugal and Greece are seriously influenced by the global financial crisis, and the unemployment rates in these countries are tremendous, Italy is reported to be slightly affected.

Before the analysis is made, the current account balances of Italy and Germany are to be compared. In 2012 the balance of Italy was reported to be – $72,02 billion, according to the data provided by the International Monetary fund.  The current account balance of Germany is $188.6 billion (2011 est., hereby it becomes evident that the market position of the FRG are considerably more advantageous than the Italian ones.

The following diagram illustrates the major discrepancies in the current account balances of the targeted countries

German v. Italy Account Balances

The diagram, provided above clearly defines that with the advent of the global financial crisis 2007-2012 the positions of Italy in terms of current account balance were heavily shattered, while the German ones remained stable. With the development of the crisis related events  the balance of Germany was slightly reduced, but this reduction was not substantial, since it did not reach the negative value. In contrast, the losses of Italy and its budget deficit reached a negative value. The roots of this discrepancies shall be sought in  the fact that the economy of Italy is more service-oriented, while the German one is industry –focused. The crisis primarily affected the service-oriented industries and therefore Italy was mostly hit.

Real Exchange Rate for the Period 1982 -2012

The discussed economic indicator reveals the rate of the national currency if exchanged for the foreign.  Initially, Italy was confined to the popular Bretton-Wood system, but with the globalization of the international economy and increase in the export and import operations of the country this system was abandoned (Benjamin, 2008). The following graph indicates the changes in the Real Exchange Rates of the Countries for the latest 20 years :

It shall be accentuated that the Real Exchange Rate of the domestic currency (previously the Italian Lira and nowadays the Euro) highly depends on the two groups of determinants the long-run and short run ones. With regard to the Italian situation, the short run dominates over the long ones, since Italy is in the Eurozone and its economic policy is consistent and simultaneously dependent on the common European framework. 

Since Italy was labeled by the World Trade Organization as the country with free market, the policy currently lead by the Italian financial authorities can be defined as flexible one.  In contrast to the one of the major competitors, the Federative Republic of Germany, in where the RER is fixed/adjusted, the RER in Italy is more vulnerable to the market fluctuations, but at the same time the government of Italy is capable of accruing additional revenues on the variances of the exchange rates.

The detailed explanation of the Italian economic phenomenon can be partially explained by the Marshall-Lerner condition, which explicates that if the value of the national currency is reduced in value, the balance of payments of this country shall not be immediately improved.

Real GDP

Having analyzed the present diagram, it becomes evident that although initially the GDP of Italia was growing, even within the frontiers of the European Union, having reached its maximum in 2003, the GDP dropped down fundamentally. In 2012, it is reported to reach the near critical point of 0,8 %. GDP per capita of the reviewed country is reported to be $ 36, 267, which is relatively a positive figure in contrast with the rest of the European countries, including those, which are considered to be acknowledged leaders of the European economic area.

With regard to the vacillations of the exchange rates of this country since the integration of Italy to the common Eurozone, it can be specified that the following variations took place since 1982:

The linear graph clearly illustrates that the Real GDP of Italy is highly influenced by the European and international market as well, since the drops in the periods of overall recession (1993, 2008-2010) are evident.

With regard to the comparative study of Italy and German it shall be stressed that almost similar statistics is reported to be in the both discussed countries, since their economies are influenced by the similar determinants.

Unemployment Rate

The following graph depicts the unemployment rate of Italy:

After the analysis of the graph, it became evident that although the repercussions of the global financial crisis are almost tackled by the Finance and Labor Ministries of Italy, the number of unemployed persons across the country continues to grow.  Overall, it is ultimately evident from the discussed graph that the unemployment rates in Italy are determined by the global macroeconomic variables (Stephen, 1988). Within the periods of global economic recession , the unemployment rates of  this country rises, and with the gradual recuperation of the economy the situation simultaneously becomes better.

Government Debt of Italy

The below outlined graph depicts the fluctuations of the total public debt of the country for the latest 20 years:

The total government debt of Italy was reported to rise to $ 2,223 trillion in 2012, hereby exceeding 120% of the gross domestic product of the country. Although the figures are not catastrophic for the Italian economy, the massive layoffs, especially among the state employees, were reported to take place because of recommendations of the International Monetary Fund and other lending organizations. 

The Budget Deficit of Italy

Budget deficit is reviewed by both scholarly and practicing communities as negative economic condition for any country. The following graph depicts the percentage of the public Italian expenditures over the revenues accrued in all forms by the state fiscal authorities:                                

The data clearly illustrates that with the advent of the global financial crisis, financial positions of Italian government have been substantially undermined. Although set of sanitary activities have been launched by Italy, there were no significant improvements.

However, it is also evident from the graph that with the European integration of Italy and internationalization of the Italian economy into the common European economic zone, the budget deficit of this country was shortened significantly.


Assuming that Italy leaves Eurozone and reinstalls the turnover of the Italian Lira, bright economic prospects may be opened for this country. First and foremost, customs payment levied by the Tax and Customs service of Italy will fulfill the budget of the country. Secondly, the levy of various excise duties, obligatory customs payments and other taxes will be extra profitable due to the facts about the differences in the rates (Blackwell, 2011).

The Policies to Promote Export Driven Growth

The abandonment of the Eurozone by Italy and the adoption of the Lira currency necessitate the implication of the exchange rate and other relevant policies which are designed to promote export driven growth of the domestic economy.

With regard to the exchange rate policy, it seems to be relevant to choose the floating charge exchange system. Although under this assumption the country is considerably more susceptible to the influence exercised by the foreign market, the real capability to exercise foreign exchange transactions freely. Besides, this exchange type provides an opportunity for the Italian domestic producers to accrue additional revenues because of the currency values, and hereby the export operations can be reasonably expected to be increased.

The following diagram depicts the situation under the floating exchange rate

This diagram, in its turn has been designed to expose the opposite trend, i.e. the situation if Italy adopts fixed exchange rate policy.

The graphs explicitly illustrate that the fiscal policy with the floating exchange rate is considerably more advantageous for the developing Italian economy.

Another important assumption which needs to be accented in the present context is the revenues that can be accrued on the basis of the Marshall –Lerner Condition.  The pith of this formula is the assumption that the devaluation of the national currency inevitably leads to the increase in export operations due to the reduction in the pricing policy. Therefore, it can be assumed that even if Italy adopts its own new currency and this exchange rate for this currency will be low in contrast to the existing one , the revenues will be ultimately increased due to increase in export-related operations.

Short Term Risks

The biggest risk with regard to the short-term risks is the fact that the current account balance of Italy is very likely to be considerably diminished as a result of decrease in export revenues inflow. The inflow is primarily affected by the factors which are known as lag in consumers’ response and lag in producers response (Pilbeam, 2006). The reaction of the counteragents to the devaluation processes is more or less predictable. For some time the situation will be unchanged , but since the devaluation is fully perceived by the domestic producers, the production of the exportable is likely to be increased in the upcoming future. Another aspect worth being accentuated is the imperfect competition among the producers. The export prices of the competitor can be reduced due to their unwillingness to lose share in the Italian devaluing market (Pilbeam, 2006). Hereby, it is reasonable to stipulate that the domestic producers will be heavily affected.


Having encapsulated the main points of this essay, the following inferential conclusions can be drawn. First and foremost, at the initial stages of the development of the Italian economy, closer integration and cooperation with the European Union in general and European Economic Area in particular, was a necessary measure to solidify the economy of the country. However, since the economy of the discussed country was duly improved and stabilized, the European Union and its rigid economic requirement started to drag Italy down. The fall of the Italian GDP and other macroeconomic indicators explicitly signal that the “strong” players of the union outscore Italy and press it financially (Pilbeam, 2006).

Although, nowadays, Italy has permanent access to the common European markets, the possibility of exit from the Eurozone should never be abandoned. Careful and meticulous consideration of all pros and cons of this opportunity clearly suggests that if the necessary promotional activities are launched by the state fiscal authorities, the country is likely to keep afloat in order to recuperate its economy.