What's responsible for pushing Italy over the edge?

Here are four forces to blame: the debt, the productivity shortfall, widespread corruption, or the slow South of Italy. Forces that are responsible for downturn in Italys economy are explained as follows : 1. THE DEBT Italys debt of $ 2.6 trillion (120% of GDP) is not the only reason for downturn. Back in 1990s, Italy's government actually learned to budget carefully and enjoyed slow but consistent GDP growth. Low deficits kept the size of the debt stable, and an expanding economy, aided by moderate inflation, made it possible to finance interest payments on what the government already owed. Thus, the country's economy stayed afloat. Then, like Venice in the lagoon, it slowly began to sink. Starting in 2001, Italy's GDP growth turned absolutely paltry. It finally plunged below zero during the global recession and has barely recovered since. Now investors are concerned about the country's ability going forward to cover its interest payments without incurring ever-higher levels of debt. Those fears, paired with jitteriness over Euro-zone neighbors like Greece, have forced Italy to pay more and more for credit. It's the cutoff where traders have to post extra collateral to buy and sell bonds. That's making it more expensive, and less appealing, for investors to lend Italy money. In the end, the government may not be able to sell enough new debt to cover its old debt 2. THE PRODUCTIVITY Italy's productivity gains, meanwhile, have been abysmal. Reaching back to the 1990s, Italian employees have been clocking longer hours while producing less. The International Monetary Fund found that compared to other euro zone countries, Italy suffered from excessive regulation and a dearth of R&D spending. Because the economy is dominated by small and medium sized businesses its capital markets are poorly developed. And those mom-and-pop operations also aren't able to achieve the crucial economies of scale that create efficiencies. The upshot: you have an economy dominated by red tape and small companies, which lack the funding to make technology investments that would improve their competitiveness. With 8% unemployment rate, Italy basically has a split job market--one for the young, and one for the old. Senior workers are protected by inflexible employment laws that make them hard to fire. Meanwhile, young Italians, who have an unemployment rate above 27%, are relegated to short-term contracts that leave them hopping job to job. That's not a recipe for a productive labour force. 3. THE GOVERNMENT (AND THE MAFIA) Corruption and weak rule of law are poisonous for business. Beyond that, they also allow the country's robust underground economy to flourish. Stereotypes about Sicilian mob bosses aside, more than 15% of Italy's economy happens in the shadows--the government regularly releases an official estimate-costing the government about 100 billion euro a year. 4. THE SOUTHERN KINGDOM OF SICILY Italy is composed of three distinct regions: the republics of the North, the central papal states surrounding Rome, and the southern Kingdom of Sicily. Some believed that the regions were too distinct to function as a single country. GDP per capita in the North and center is more than 40% higher than the south, which holds about a third of the country's overall population. Unemployment, crime, and black market labour are also concentrated in the South.

5. THE INFLATION RATE

Main causes for increase in inflation rate are increase in sales tax and increase in prices of oil. Measures to control inflation rate will include fiscal policies like lowering the expenses on govt level, high direct taxes and monetary policies like rise in interest rates for encouraging saving rate, controlling monetary inflation, limiting the growth of broad money due to decrease in demand for loan. An increase in the payment of mortgage interests automatically decreases the real 'effective' disposable income of the house owners, as well as their spending capacities. Long time measures like supply side reform policies and policies regarding labour reform policies can be exercised.

6. THE UNEMPLOYMENT

Unemployment Measures 1.Boost Aggregate Demand. The government could use reflationary fiscal policy to try and increase AD. For example, the government could cut taxes and increase Spending; this would increase AD and lead to higher growth. As growth increases firms would demand more workers. However,Could cause inflation. Growth in 2007 was 3.8%. This suggests a lot of the unemployment is supply side. Government debt in Italy is already very high. Therefore, in the long term expansionary fiscal policy would make the government debt worse, possibly contributing to crowding out and higher interest rates 2.Leave the Euro and Cut Interest Rates. Rather a radical suggestion, but, it has done the UK no harm to be outside the EURO. It gives the UK freedom to cut interest rates for what the economy needs rather than what is good for the EU area. However, would cause inconvenience of exchange rate fluctuations and transaction costs. Lower interest rates arent guaranteed to solve unemployment either. 3.Supply side Policies. There are many supply side policies the government could try and use. For example a) Increased Labour market flexibility. - Easier to hire and fire workers. This may encourage firms to take on workers because there is less red tape and bureaucracy involved. However, it might require the EU to change its employment law. The Spanish government can only do so much

b) Education and Training. A lot of unemployment is focused amongst young people in inner cities. The government could try to reintegrate this group into the labour market through supply side polices such as spending on improving skills. They could also try similar things to the UK new deal, such as, giving better information and encouraging people to get a job or lose benefits. c) Government Subsidies of Jobs. d) Shorter Working Week.