Assignment 1

ECONOMY OF
ITALY
- A Report covering
influencing factors
affecting the Growth
Rate.

Submitted By: ~
MANISH KUMAR
 Roll No.-036

Introduction
Italy, officially the Italian Republic, is located on the Italian
Peninsula in Southern Europe, and on the two largest islands in
the Mediterranean Sea, Sicily and Sardinia. Italy shares its
northern Alpine boundary with France, Switzerland, Austria and
Slovenia. The Capital of Italy is Rome. Italy is subdivided into 20
regions. It is further divided into 109 provinces (province) and
8,101 municipalities.

It is a democratic republic and a developed country with the

8th-highest Quality-of-life index rating in the world. It is a
founding member of what is now the European Union (having
signed the Treaty of Rome in 1957), and a founding member of
the North Atlantic Treaty Organization (NATO). It is a member of
the G8 (having the world's 7th largest nominal GDP),
Organization for Economic Co-operation and Development
(OECD), World Trade Organization (WTO), the Council of Europe,
the Western European Union. It has the world's 7th largest
defence budget and shares NATO's nuclear weapons. On 1
January 2007, Italy began a two year term as a non-permanent
member of the United Nations Security Council.

Socio-economic Features
Politics:

The politics of Italy take place in a framework of a

parliamentary, democratic republic, and of a multi-party
system. Executive power is exercised collectively by the Council
of Ministers, which is led by a Prime Minister who is appointed
by President. Legislative power is vested in the two houses of
parliament primarily and secondarily on the Council of
Ministers. The judiciary is independent of the executive and the
legislative. Italy has been a democratic republic since 2 June
1946, when the monarchy was abolished by popular
referendum (see birth of the Italian Republic). The constitution
was promulgated on 1 January 1948.

Ethnic groups:

Italian (includes small clusters of German-, French-, and

Slovene-Italians in the north and Albanian-Italians and Greek-
Italians in the south)

Religions:

Roman Catholic 90% (approximately; about one-third

practicing), other 10% (includes mature Protestant and Jewish
communities and a growing Muslim immigrant community)

Languages:

Italian (official), German (parts of Trentino-Alto Adige region are

predominantly German speaking), French (small French-
speaking minority in Valle d'Aosta region), Slovene (Slovene-
speaking minority in the Trieste-Gorizia area)

Literacy Rate:

98.4% (male: 98.8%, female: 98%) as per 2001 census.

Population:

In October 2007, the Italian population surpassed 59.7 million,

Italy currently has the fourth largest population in the European
Union, and the 23rd largest population worldwide. Italy's
population density at 196.1 persons per kilometer is the fifth
highest in the European Union.

The population as per July 2008 estimate is 58,145,321.

Infrastructure:

There are approximately 654,676 km (406,797 mi) of

serviceable roadway in Italy, including 6,957 km (4,323 mi) of
expressways. The railway network in Italy totals 16,627
kilometers (10,331 mi), ranking the country 17th in the world
and is operated by Ferrovie dello Stato There are approximately
133 airports in Italy, including the two hubs of Malpensa
International (near Milan) and Leonardo Da Vinci International
(near Rome). There are 27 major ports in Italy; the largest is in
Genoa, which is also the second largest in the Mediterranean
Sea, after Marseille. 2,400 km (1,500 mi) of waterways traverse
Italy.

ECONOMY
The economy of Italy has changed dramatically since the end of
World War II. From an agriculturally based economy, it has
developed into an industrial country ranked by both the World
Bank and the International Monetary Fund as the world's sixth
largest economy in USD exchange-rate terms and either the
ninth (World Bank) or tenth (IMF and the CIA World Fact book)
largest in terms of purchasing power parity (PPP).

The country belongs to the Group of eight (G8) industrialized

nations; it is a member of the European Union and the OECD.
This capitalistic economy remains divided into a developed
industrial north, dominated by private companies, and a less-
developed, welfare-dependent, agricultural south.

The country's main economic strength has been its large base
of small- and medium-sized companies. Italian industry is
envied for its advanced design and style, which often
capitalizes on the country's formidable artistic patrimony.

More recently, Italy has faced sluggish economic growth and

reduced international competitiveness. However, statistics as of
2007 show signs of acceleration in GDP growth, estimated at
2% in 2006, a record high since 2000. According to GDP
calculations, Italy was ranked as the seventh-largest economy
in the world in 2006, behind the United States, Japan, Germany,
China, the United Kingdom, and France, and the fourth-largest
in Europe. In the Index of Economic Freedom 2008 it ranked
64th of 162 countries, or 29th of 41 European countries, the
lowest rating in the EU-15 and behind many ex-communist
European countries. Also Tourism is very important to the Italian
economy: with over 37 million tourists a year, Italy is ranked as
the fifth major tourist destination in the world

Italy has often been called a sick man of Europe, with

governments having problems in pursuing reform programs.
According to World Bank data, Italy has high levels of freedom
to invest, do business, and trade. On the other hand, Italy has
inefficient bureaucracy, relatively low property rights and high
levels of corruption (compared to other European countries),
heavy taxes, and heavy public consumption at around half of
GDP. Italy has been in economic decline compared to most
other EU-15 countries. Most raw materials needed by Italian
industries, and more than 75% of energy requirements, are
imported.

Italy's economic performance has at times lagged behind that

of its EU partners, and the current government has enacted
numerous short-term reforms aimed at improving
competitiveness and long-term growth. Italy continues to
grapple with budget deficits and high public debt--2.0% and
105.6% of GDP for 2007, respectively. The Italian economy is
also affected by a large underground economy--worth some
27% of Italy's GDP. This production is not subject, of course, to
taxation and thus remains a source of lost revenue to the local
and central government.

The economy has moved slowly, however, on implementing

certain structural reforms favoured by economists, such as
lightening the high tax burden and overhauling Italy's rigid
labour market and expensive pension system, because of the
economic slowdown and opposition from labour unions.

In years, the Economy in Italy has prospered to the extent that

it is capable of importing maximum raw materials as well as 75
percent of the energy requisites of the country.

Italian Economy is developing very fast. Today the condition is

such that it is self-sufficient enough to cope up with the global
race of economic and financial developments.
Gross Domestic Product

GDP - purchasing power parity:

$1.786 trillion (2007 est.)

GDP - real growth rate:

1.5% (2007 est.)

GDP - per capita (PPP):

This entry shows GDP on a purchasing power parity basis
divided by population as of 1 July for the same year.

Y GDP - per capita

 ear (PPP) (US$)
2
25000
003
2
26700
004
2
27700
005
2
28700
006
2
30200
007
2
31000
008

GDP - composition by sector:

Agriculture: 1.9%
Industry: 28.9%
Services: 69.2%

Labor force - by occupation:

Agriculture: 5%
Industry: 32%
Services: 63% (2001)

Italy’s GDP grew by 1.5 per cent in real terms in 2007 (1.8 per
cent in 2006),
again underperforming the rest of the euro area. GDP growth in
2007 was almost entirely driven by the service sector, with a
barely positive contribution from industry and nil from
agriculture. Most of the increase of 1.8 per cent in value added
in services came from the acceleration in monetary and
financial intermediation, which had already grown rapidly in the
previous two years, transport and communications, and
distribution.

Employment and Unemployment

The Employment scenario in Italy is good but is due to be

affected by the Sub-prime crisis. Most Italian unions are
grouped in four major confederations: the General Italian
Confederation of Labor (CGIL), the Italian Confederation of
Workers' Unions (CISL), the Italian Union of Labor (UIL), and the
General Union of Labor (UGL), which together claim 35% of the
work force. Unemployment rate is percentage of unemployed
persons in the labour force which is a regional issue in Italy--low
in the north, high in the south. Women and youth have
significantly higher rates of unemployment than do men. The
overall national rate is at its lowest level since 1992. The Italian
unemployment rate has been steadily falling since the last
quarter of 2004, and in the last quarter of 2007 it stood at 6
percent, its lowest level since 1993.

However these record-low unemployment rates in Italy mask

significant regional disparities in joblessness. The jobless rate in
Italy's industrial north was 3.4 percent in the fourth quarter,
compared with almost 11 percent in the south of the country.
Italian unemployment has in fact declined steadily since 1999
after the introduction of changes in labour market regulations
which effectively made it easier for companies to hire part-time
and temporary workers who don't enjoy the same benefits and
job security as full-time staff and can be more easily fired when
financial constraints force cuts.
The reduction in the unemployment rate was facilitated by the
small rise in the
labour force, which increased by just 0.3 per cent and 66,000
persons

Inflation rate of Italy

This entry furnishes the annual percent change in consumer

prices compared with the previous year's consumer prices. The
following table shows the rate of Italy annual inflation in recent
years.

Y Inflation rate (consumer

ear prices) (%)
2
2.4
003
2
2.7
004
2
2.3
005
2
2
006
2
2.3
007
2
1.7
008

The average result masks divergent trends over the year. After
falling below 2 per cent in the first nine months, inflation rose
sharply in the fourth quarter, as in the rest of the euro area,
driven by the surge in food and energy prices. The moderation
of domestic costs, in particular the lack of wage pressures and
the appreciation of the euro, helped curb the increase in the
prices of the other components. Since the final part of 2007 the
economic situation has deteriorated: the rate of inflation has
risen, driven by persistent increases in the prices of food and
energy commodities.

A contribution to curbing average inflation in 2008 came from

the moderate rise
in regulated prices (0.6 per cent). This was a result both of the
slowdown in gas and electricity tariffs and of the decrease of
5.2 per cent in the prices of medical products. The latter
reflected the discounts imposed on pharmaceutical companies
by the Italian Drug Agency; these discounts are taken into
account by the price index for the entire resident population but
not by the harmonized index.

The short-term inflation outlook for Italy depends on the

evolution of food and energy commodity prices in the coming
months.
Investment

This entry records total business spending on fixed assets, such

as factories, machinery, equipment, dwellings, and inventories
of raw materials, which provide the basis for future production.
It is measured gross of the depreciation of the assets, i.e., it
includes investment that merely replaces worn-out or scrapped
capital.

Y Investment (gross
ear fixed) (%)
2
19.1
004
2
19.3
005
2
20.6
006
2
20.8
007
2
20.6
008

Investment in residential building slowed. Accumulation in

machinery, equipment and transport equipment stagnated,
reflecting the progressive weakening of economic activity,
which was only partly offset by the favourable financing
conditions prevailing for most of the year. In 2007 the growth in
gross fixed investment was half that of the previous year (1.2
as against 2.5 per cent). Except for non-residential building, the
slowdown involved all categories of capital asset and especially
machinery, equipment and transport equipment

Interest Rates

In 2007 the increase in short-term interest rates was smaller in

the South than
in the Centre and North; the credit cost differential between the
two areas narrowed by 0.2 percentage points from the previous
year, to 1.3 points (in the mid-1990s it stood at 2.5 points).
When the average interest rate for firms in the South is
calculated using the sectoral and size composition of the loans
granted to firms in the Centre and North, the differential in
2007 is less than one percentage point. The remaining cost
differential reflects the greater riskiness of firms in the South,
which can be attributed to the external diseconomies that
weigh on productive activity in the area.
The activity of Italian banks in 2007 was shaped by the increase
in official rates
until June and, in the second half of the year, by the crisis
triggered by subprime
mortgages in the United States. The overall direct and indirect
exposure of Italian
banks to financial assets linked to subprime mortgages was
modest; the turmoil in
the financial markets affected the cost and composition of their
borrowed funds. Theeffects of the deterioration in the business
cycle were milder.
The ratio of bank lending to GDP rose by 5 points to 109 per
cent.

Foreign Relations

Italy was a founding member of the European Community—now

the European Union (EU). Italy was admitted to the United
Nations in 1955 and is a member and strong supporter of the
North Atlantic Treaty Organization (NATO. Its recent turns as
rotating Presidency of international organizations include the
CSCE (the forerunner of the OSCE) in 1994 G8, the EU in 2001
and from July to December 2003.
Italy supports the United Nations and its international security
activities. Italy deployed troops in support of UN peacekeeping
missions in Somalia, Mozambique, and East Timor and provides
support for NATO and UN operations in Bosnia, Kosovo and
Albania. Italy deployed over 2,000 troops to Afghanistan in
support of Operation Enduring Freedom (OEF) in February 2003.
Italy still supports international efforts to reconstruct and
stabilize Iraq, but it has withdrawn its military contingent of
some 3,200 troops as of November 2006, maintaining only
humanitarian workers and other civilian personnel. In August
2006 Italy sent about 2,450 soldiers to Lebanon for the United
Nations' peacekeeping mission UNIFIL. Furthermore, since 2
February 2007 an Italian, Claudio Graziano is the commander of
the UN force in the country.
Foreign Trade and Exchange

Italy is a member of the European Union and the World Trade

Organization; furthermore it is country which has participated
to the European Monetary Union.
In Italy foreign trade is conducted according to the EU norms
and regulations. There is no other foreign trade regulation on a
national basis other than the common foreign trade policy of
the EU .Italy's closest trade ties are with the other countries of
the European Union, with whom it conducts about 60% of its
total trade. Italy's largest EU trade partners, in order of market
share, are Germany (19%), France (13%), and the Netherlands
(6%).

Major Exports

• Motor vehicles (Fiat Group, Aprilia, Ducati, Piaggio)

• Chemicals & petrochemicals (Eni)

• Electricity (Enel, Edison), home appliances (Merloni,

Candy), aerospace and defence tech (Alenia, Agusta,
Finmeccanica), firearms (Beretta)

• In the field of fashion (Armani, Valentino, Versace, Dolce &

Gabbana, Roberto Cavalli, Benetton, Prada, Luxottica),
food industry (Ferrero, Barilla Group, Martini & Rossi,
Campari, Parmalat),

• Luxury vehicles (Ferrari, Maserati, Lamborghini, Pagani)

and motoryachts (Ferretti, Azimut).

The solid performance of exports, fuelled by the expansion of

outlet markets and the enhanced competitiveness of Italian
firms involved in the ongoing restructuring process, provided
the main contribution to growth. According to national accounts
data, exports of goods and services increased by 5 per cent in
real terms in 2007, benefiting primarily from the strong increase
in demand from Spain, the smaller EU economies and the main
energy-exporting countries, whose spending capacity was
strengthened by abundant oil revenues.

Exports grew more strongly in the sectors of refined petroleum

products,
transport equipment, and mechanical machinery and
equipment, while they declined in traditional sectors such as
textiles and leather.

Exports:
$501.4 billion f.o.b. (2007 est.)
Exports - partners:
Germany 12.9%, France 11.4%, Spain 7.4%, US 6.8%, UK 5.8%
(2006)

Imports:
$498.6 billion f.o.b. (2007 est.)
Imports - partners:
Germany 16.9%, France 9%, China 5.9%, Netherlands 5.5%,
Belgium 4.3%, Spain 4.2% (2006)

On the basis of national accounts data, imports of goods and

services
grew by 4.4 per cent last year in real terms. Imports from China
expanded strongly again (17.5 per cent in volume) and China
became the third
largest supplier of goods to Italy. Imports of crude oil and
natural gas, which make up the preponderant part of Italy’s
purchases of energy products, grew in volume by 1 per cent
and accounted for around 13 per cent of total imports at
current prices.

The Currency of Italy is Euro

RO FOREIGN EXCHANGE REFERENCE RATES AS OF 14/11/2008

US dollar 1.2675

Japanese yen 122.17

Pound sterling 0.85980

Swiss franc 1.5100

Canadian dollar 1.5504

Capital Flow

In 2007 the Bank of Italy produced 1 billion banknotes in €20,

€50 and €100
Denominations. It put 2.2 billion banknotes into circulation, for
a total value of €84 billion. The return flow to the Bank
amounted to 2 billion banknotes worth €75.3 billion; most of
these notes were selected automatically at the Bank’s
branches. Growing demand for euro banknotes (from outside as
well as inside the Community) and the increased need to
replace worn notes have caused an upturn in required
production that, after appearing in the quantities specified for
2007 and 2008, could become permanent in the medium term.
These factors, together with the larger volumes foreseeable in
view of the introduction of the second series of euro notes, call
for measures to increase the production capacity of the Bank’s
printing works. The value of the banknotes in circulation at the
end of 2007 amounted to €128.5 billion (19 per cent of the
Eurosystem total) and was up by 7.3 per cent from €119.7
billion at the end of 2006; the amount recorded in the accounts
(€112.2 billion) represented the 16.6 per cent share of total
Eurosystem circulation notionally assigned to the Bank of Italy.
At 31 December 2007 the gold and foreign currency reserves
were worth €68.4
billion, compared with €62.7 billion a year earlier. The increase
mainly reflected the 18 per cent rise in the price of gold and
was only offset in part by the depreciation against the euro of
all the leading currencies (the US dollar, the yen, the pound
sterling and the Swiss franc). As in the preceding years, the
foreign currency reserves were mostly invested in government
securities, securities of government agencies and the BIS,
commercial paper, certificates of deposit and deposits at
leading international banks. Use was also made of international
futures markets for the management of the reserves. Between
the end of 2006 and the end of 2007 the composition of the
reserves other than gold and SDRs saw the share denominated
in dollars basically unchanged at about 61 per cent, reductions
in those denominated in pounds sterling and Swiss francs from
respectively 26.5 to 22.1 per cent and 3.4 to 1 per cent, and an
increase in
that denominated in yen from 8.7 to 15.5 per cent.

Summary
In 2007 the Italian economy grew at a slower rate than the
average in the rest of
the euro area (1.5 as against 2.8 per cent), the pattern since
the mid-1990s. Services accounted for almost all of the
expansion, while industrial activity contracted from the
beginning of the year, contrary to the trend in the other main
European countries. A less unfavourable picture of the Italian
industrial cycle in 2007 emerges based on the indicators for
turnover and orders, which appear more clearly to capture the
effects of the progressive internationalization and shift in the
composition of output towards higher-quality goods, which
industrial production statistics can only partly take into account.
The rate of inflation in 2007 averaged 1.8 per cent, as
measured by the index of
consumer prices for the entire resident population. The average
result masks divergent trends over the year. After falling below
2 per cent in the first nine months, inflation rose sharply in the
fourth quarter, as in the rest of the euro area, driven by the
surge in food and energy prices. The moderation of domestic
costs, in particular the lack of wage pressures and the
appreciation of the euro, helped curb the increase in the prices
of the other components.
The solid performance of exports, fuelled by the expansion of
outlet markets and
the enhanced competitiveness of Italian firms involved in the
ongoing restructuring process, provided the main contribution
to growth. By contrast, domestic demand failed to strengthen
sufficiently. The growth in household expenditure remained low,
reflecting primarily the protracted weakness of disposable
income, which since 1991 has grown in real terms at an annual
average rate of just 0.3 per cent (compared with 1 per cent in
Germany and 2.2 per cent in France). In 2007 the uncertainty
engendered by the effects of the crisis in the international
financial markets and the erosion of purchasing power
associated with the acceleration in prices in the fourth quarter
also had a large impact. In addition, the boost provided by
capital gains, which in the early 2000s had been very
substantial for housing wealth, weakened.
Investment in residential building slowed. Accumulation in
machinery, equipment and transport equipment stagnated,
reflecting the progressive weakening of economic activity,
which was only partly offset by the favourable financing
conditions prevailing for most of the year.
Since the final part of 2007 the economic situation has
deteriorated: the rate
of inflation has risen, driven by persistent increases in the
prices of food and energy commodities; confidence among
households and firms has eroded, in response to the uncertain
world economic outlook. Based on the most recent indicators,
the acceleration in GDP recorded in the first quarter of 2008,
which offsets the equivalent decline in the previous quarter,
appears to be partly temporary.