Italy’s sluggish recovery worries EU

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Out of recession in 2014, Italy saw GDP up 0.4% in June.

Lagging

Italy’s recovery though is poor: the average Eurozone rate is double.

Unemployment will also be above 10% next year and with wages at a 20 year low, consumer confidence is still muted. Consequently, the service industry is in a bad state.

Structural issues

Like Japan, Italy has an aging population and a big debt pile. Unlike Japan, its recovery is weak but it can rely on immigration to fill labour gaps. However, this doesn’t stop Italy’s social care budget from ballooning. As a result, the IMF has advised a pension spend reduction.

Meanwhile, the banking system is only just beginning to regain investors’ confidence.

Ever since the 2012 sovereign debt crisis, Italy has been seen as a home of bad debt, i.e. loans which are unlikely to be repaid. And this tag won’t go away soon: only in June, the government bailed out 2 banks to the tune of $19bn. As a result, Italian businesses are struggling to get finance.

It might get worse

The upcoming election could lead to a hung parliament, and weaken already fragile market confidence.

But bigger still, is the prediction that the ECB will taper its bond purchasing programme and raise interest rates soon. This will not only make repaying existing debt harder but squeeze access to credit for cash starved Italian businesses even further.

And worse

If Italy does go under, it could cause another Eurozone panic.

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