My interesting experience getting out of Cairo at an unconscionable hour was rewarded with a morning arrival in Rome, Italy, and a great meeting at the Ministry of Economy and Finance in the heart of Rome. Stefano Scalara who is a counsellor to the Minister shared a wealth of information about the Italian economy, governmental reforms, and some of the challenges facing Italy.
With all the headlines related to the Greek debt crisis and some of Italy’s challenges with debt in recent years, one can’t help but wonder if Italy is also in dangerous waters when it comes to the overall level of debt and ability to service it. I posed this question to Stefano who didn’t even blink with his response – Italy is most certainly not Greece, and Italy is taking its medicine, implementing reforms, and making the adjustments necessary to grow and improve in the future.
We talked about Italy’s role in Europe and in the broader global economy. Stefano shared some data that indicates Italy is Europe’s second-largest manufacturing and industrial country, second only to Germany. They also have one of the biggest export-oriented economies in the euro zone. This led us to the “Four F’s” of Italian manufacturing: Food, Fashion, Furniture… and Ferrari. The last one is said a bit tongue in check, but it illustrates the point. Italy produces and exports a great number of products and has moved into new sectors such as robotics, biopharma, and aerospace.
Another bright spot for Italy is the fact that they have a healthy private sector and are a nation of savers. As Stefano highlighted, Italian private debt to GDP ratio is among the lowest in Europe. He said that Italians have the second highest per capita savings rate in the world, just after the world’s best savers, Japan.
Stefano has a wealth of data and information to share to illustrate the condition of Italy. I’ve included the presentations at the bottom of this blog if you’re interested in reading more. I think the data is quite interesting so I hope you’ll take a minute to look through it.
Beautiful cars and fantastic food, however, only goes so far for Italy. Not everything is coming up roses in Italy. Stefano acknowledged Italy has some real challenges as well.
I asked about the unemployment rate, and specifically, the very high rate of youth unemployment that is hampering Italy. Stefano noted that the educational system has been rooted in very traditional approaches to teaching and learning. In short, the educational system hasn’t been adequately preparing students to enter the workforce with the skills necessary for success.
Italy is trying to address this issue with educational and employment reforms. Additional details on these reforms are also available in the attached presentations at the bottom. The “Good Schools” Project is one example where local school administrators can innovate and customize the curriculum to offers skills in particular areas. Corporations partner with these schools to help teach, mentor, and ultimately hire the students coming through the programs.
Another important area of reform is related to banking. Italy has a very traditional approach to banking. They’ll lend to families who have collateral… but when it comes to entrepreneurs who need capital for their new ventures, Italian banks aren’t much help. This unwillingness to lend to start-up companies is a significant barrier to economic growth in Italy. With new banking reforms, there are approx. 300 new start-ups launched in Italy each month. 70% of all new jobs in Italy are created by start-up companies.
Additional challenges in Italy include civil justice, corruption, taxation, electoral law, and constitutional reform. From our discussion, it is clear several systems in Italy are very complex, very antiquated, and very ripe for change. The tax system in Italy, for example, is one that is incredibly complex and one that has stifled both domestic growth and foreign investment. Stefano stated that Italy has adopted the most progressive tax stance in recent Italian history. He’s optimistic they’re on the right path.
The political system in Italy is yet another challenge that remains. Stefano noted that he has worked for five different ministers (at the helm of the Ministry of Economy and Finance) in the last four years. That’s like working for a new, different CEO every 9 months. Each new minister has their own agenda, ideas, and initiatives they’re eager to pursue, so electoral law reform is a much needed change to prevent the “higher than optimal” levels of turnover within the central government.
I learned a great deal from Stefano in our discussion and I’m grateful for his time and insights. Italy is a beautiful place with outstanding history and culture. Let’s hope the reforms and changes Italy is pursuing will address some of the systemic issues which have plagued it for too long.
Special thanks to Brennan Staheli, Evan Fiala, and the Lunt Capital team for their contributions to this report.