Amid the continued noise around Greece and Spain's ongoing debt woes, some good news from the eurozone's periphery has been almost overlooked as Italy has started to show signs of overcoming its many problems. The data is as complex and nuanced as any performance of Verdi, but with a contraction for next year forecast at 1 per cent, with the proviso that upgrades are on the cards, parts of the Italian economy seem to be at last getting into their beautifully designed stride.
Predictably, it is the bond markets that have taken the lead. Yields on Italian 10-year government debt, which briefly threatened to sink the country last year, have fallen by just under half to 4.3 per cent. The turnaround can be attributed to the relatively smooth implementation of structural reforms, which the Mario Monti-led government managed to pass with relatively little trouble. This should give business an immediate supply-side boost, as regulations prohibiting the hiring and firing of the country's notoriously cosseted employees on permanent contracts are eased.
The reforms have started to have an impact on business surveys with manufacturing companies, which stand to gain most from a newly competitive workforce on the open export market, recording an increase in confidence, while companies in the still subdued domestic service industries remain more pessimistic. What will help the country is its surprisingly large exposure to emerging markets, with more than 7 per cent of its total exports - second only in the eurozone to Germany with 11 per cent - going to many key emerging markets.
By contrast, the supposed freedom offered by the ability to allow sterling to depreciate has not translated into a bigger share of exports for British companies - indeed, the UK's share has actually stagnated. Some say this is because companies prefer to book a larger, if devalued, profit in sterling rather than invest the windfall in gaining market share, reinforcing criticism that incentives are skewed in UK boardrooms. The other undeniable fact is that the Italian government had the option of a faster and deeper fiscal retrenchment, as its budget was already more balanced. By contrast, the British government is only just beginning the second round of fiscal tightening needed to restrain the deficit.
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