The Economic Situation in Italy

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The economic situation in Italy
2009
Krisztián Pásztor
5/12/2011

The Economic profile of Itlay

Since the II World War Italy has transformed form an agrecurtural society into a world industrial power. The industry is driven by the large state-owned firms and by the large number of family owned businesses. It has the seventh largest economy in the world and the fourth largest in Europe. It is part of the European Union and member of the G8 industrialised nations. The country has a high standard of living, with a $35,435 nominal GPD per capita. Italy’s economy can be divided into two parts, the industrialised North part, and the less Industrialised South part.

Rate of (GDP) growth

Before 2008 Italy had a slow but steady positive movement in its GDP. The year 2008 was the year of the economic downturn. Italy reached a -1.3% real GPD in 2008 and in 2009 it dropped to a outstanding -5% real GDP. These figures show us that Italys economy was really hit by the recession. Moreover, the italian government couldn’t significantly increase government spendings because of the country’s high budget deficit (reached -5.2% of GDP in 2009) and public debt(reached 115.8% of GDP in 2009). Unemployment rate increased 0.9% to 7.1% . The Italy government tried to stimulate the economy with a few stimulus packages. Which add up to a total of 80 billion EUR. About hafl of the money was from the European Union to help increase the economy. The government spent 20 billion euros from the 80 billion stimulus package on the italian financial sector so that they can keep up the support for the economy with conteniuos lending. They lowered mortgage rates to 4%, and spent 2,1 billion EUR on the car industry. In concluion, Italy was in a bad situation which can be easily seen by the GDP figures. They tried to increase the economy with stimulus packages with a total amount of 80 billion EUR.

Stance of fiscal policy

Italy has already had a outstandingly big public debt with more than 100% of the GDP before the crisis. One of the reasons why Italy was hit by the crisis this bad is that the government could not help the economy with expansionary fiscal policy. The country had a budget deficit of -2.7% in 2008 and -5.2% in 2009. This means that the only option was for the government to stay on a contractionary fiscal policy. They tried to increase gowernment spendings, but they were limited because of the already high budget deficit. Italy couldn’t use the tools that other developed countries used and that was increased gowernment spednings to stimulate the economy. The other problem for the country was that they had a high national debt which was 106.1% of the GDP in 2008 and a shocking 115.8% of the GDP in 2009. The country couldn’t take on much more loans to stimulate and to invest in the economy. The country is a member of the EURO zone which is good in the sence that even in the crisis they have a stable and reliable currancy, but on the other hand, they couldn’t create more money and invest it in the economy, because the European Central Bank create the euro. In conclusion the italian governmnet couldn’t realy help much on the struggling economy, because the government was also in a struggling situation or in even worse situation than the economy.

Stance of the financial system
Italy is part of the European Zone, which mean that the European Union members are a part of the European Monetary Union (EMU). This means that monetary policies are not set by the Bank of Italy anymore. The interest rates for the euro and monatery policies are set by the European Central Bank. It’s main monetary policy is maintain price stability. We can see the interest changes in the past years made by the ECB, on the following diagramm.

As we can see, after the crisis broke out the ECB started to qiuckly decrease the interest rates, to a record low level 1%. This monotery policy helps to stimulate the economy. If firms can lend money cheaper,...
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