The Italian economy - Can Berlusconi get away with it this time?

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Can Berlusconi get away with it this time?

Introduction

        Italy has a diversified industrial economy with roughly the same total and per capita output as France and the UK. The Italian economy is divided into a developed industrial north, dominated by private companies, and a less developed, welfare-dependent agricultural south. Most raw materials needed by industry and more than 75% of energy requirements are imported. Over the last ten years Italy has tried to maintain a strict fiscal policy in order to meet the requirements of the Economic and Monetary Unions.

        The European Monetary Union is built on strong fiscal discipline foundations. The budgetary autonomy of EMU’s members is subject to the constraints of the Maastricht Treaty and the Stability and Growth Pact. The Maastricht, and later Amsterdam, Treaty sets rules with regards to, among others, budget deficits, public debt and inflation as requirements for joining the euro as single currency.
        The current government of Silvio Berlusconi has initiated numerous short-term reforms trying to meet the Treaty requirements and improve competitiveness and long-term growth. Italy has moved slowly on implementing needed structural reforms, such as lightening the high tax burden and overhauling Italy's rigid labor market and over-generous pension system, because of the current economic slowdown and opposition from labor unions. Silvio’s government made several promises to the public. It promised to strengthen Italy’s economy by: 1) Cutting taxes, 2) Increasing pensions, 3) Creating new jobs, 4) Reducing crime and 5) Launching major infrastructure projects. In this essay we analyze whether Berlusconi can live up to his promises, and what the consequences of his policy decisions are for the country as a whole. What are the consequences regarding budget deficit, public debt and inflation? And which alternatives does Berlusconi have?

        In our opinion, the economy is worse off when Berlusconi executes the measures described above all at the same time. The country will end up with much more problems than it is already facing. Italy is ready for some more structural reforms and creative thinking when it comes to financing these reforms.

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Maastricht requirements

The Maastricht Treaty’s main objective is to provide a set of rules to enhance stability in the  area. In order to have a single currency, every country involved must stabilize its economy.  Stability makes the economy predictable, and prevents big movements of money, people or goods from one country to the other.

The Treaty requirements relevant for this essay are:

  • A budget deficit not to exceed 3% of GDP
  • A public debt not to exceed 60% of GDP
  • Inflation not to exceed 1,5%

The relevance of these criteria is obvious. They show ...

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