Italy AUSTIN HARDING, MARGARET WALLACE, SAM SCHOBER, DANIEL ZMUDA

Background 1990s- present Italy has fought to curb tax evasion and “black market” business ◦Makes up 25% of GDP 1999 Italy enters European Union, adopts Euro Slow economic growth between ◦Maastricht Criteria ◦Restrictive economic polies caused economy to stagnate Hit hard by Great Recession ◦National economy shrunk by 6.7% ◦Second largest debt ratio behind Greece

Government: Parliamentary Republic Italian parliament is bicameral, two chambers ◦Senate of the Republic ◦Chamber of Deputies Headed by a President who appoints a Prime Minister, the elected head of government

Who Controls the Government? Head of State ◦President ◦Appoint Prime Minister, put into effect laws and decrees, authorize gov. bills in parliament, ratify treaties and declare war with (with parliament authorization) Executive Branch ◦Prime Minister is appointed by the President ◦Prime Minister’s Cabinet is also approved by the President Judicial Branch ◦Autonomous and independent of all other branches Legislative Branch ◦Parliament is split into two Branches ◦Chamber of Deputies ◦Senate of the Republic ◦Legislative duties, present bills in parliament, bills must be approved in both houses

Taxes and Spending Decisions Taxation is carried out by the central government and regional government The President, Parliament and the Cabinet, led by the Prime Minister, work to implement laws in regard to taxation and spending ◦Taxation in Italy is Progressive

Tax Policies Tax Structure (as percent of GDP): ◦1990: 36.4% ◦2007: 41.7% ◦2009: 42.1% ◦Breakdown of Tax Revenue ◦Social Security Contributions ◦Tax on Goods and Services ◦Tax on Personal Income ◦Tax on Corporate Profits

Spending Policy Main Expenditures ◦Wage and Pension Integration 43.01% ◦Healthcare 15.80% ◦General Administration 10.88% ◦Education 6.03% ◦Interventions in the Social Field 4.19%

Primary Sources of Revenue Three Primary Sources Value-Added Tax (VAT) 22% rate Corporate Tax 27.5% rate Individual Taxes

Government Deficits Not a foreign concept

Great Recession Origin Italy - “the sick man of Europe” Economic stagnation Political instability Difficulties in reformation Structural Obstacles

Economic Impact Afflicted entities : ◦Small companies (≈95%) ◦Production (labor efficiency) ◦Industrial regions (north v. south) Mid-size co. displayed durability through crisis ◦Highest profitability through cost reduction

Economic Measures - Unemployment 2009 – Industry (+4.3%), Services: (+3.7%)

Economic Measures - GDP 2009 – largest drop recorded since 1971

Economic Measures – Debt/GDP 2009 – deficits further national debt growth

How Did Italy Respond? Two Main Responses Fiscal and Monetary policies that supported large firms and large banks, while cutting government spending on public goods and services.

Support Large Firms and Banks Italy has an assortment of banks, large and small. When the crisis hit, banks quit lending money because the risk became to high. So the Italian government supported the larger banks by providing them with loans and lower discount rates. Giving stability to the banking industry. The support carried over into the large firms of Italy. A large part of the economy operates off of trade and by helping companies survive the crisis, this allowed them to retain employees and slowly recover.

Issues Surrounding These Responses One issue that arose after this was the slow growth of GDP and the fast increasing debt. Another, was the difference in household incomes. Central and Northern parts of Italy’s GDP Per Capita were on average 40% higher than the Southern regions. The support of large businesses left small businesses in the same difficult situation without the help. So, these businesses did what economics tells them to do and moved outside the borders chasing cheaper operating costs.

Cutting Government Spending on Public Goods and Services The government spending cuts were evoked by loans they were giving to the banks avoiding raising taxes, because the goal was to steady investment and consumption. These cuts were applied towards Public Goods and services.

Issues With These Spending Cuts The Largest issue with these Budget cuts was the direct impact it had on the public sector. The distribution of these cuts was poorly placed and government employees felt the effect. Taxes didn’t decrease much if at all and income fell. Lowering government employees to a lower indifference curve.

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