Country Risk Analysis of Italy - Research Paper Example

? Running head: COUNTRY ANALYSIS OF ITALY (Your As the third largest economy in the euro zone, Italy presents both opportunities and threats as it moves from one crisis to another. Political formulations of different partners have given rise to policy uncertainties resulting in steadily falling GDP growth rate and high national debt. The nation’s credit rating has been downgraded, bond prices have become unsustainable and austerity measures are in the offing. The southern region of the country has the additional problems of illegal immigration, drug smuggling and organized crime in addition to relative underdevelopment both in the industrial sector and in technical skills of its populace. The strong export potential, relative underdevelopment of the southern region and the markets of north Africa and east European countries are the favorable endowments. Keywords: Economy, politics, geography, industry, immigration, drugs, EEC, disparities, factor productivity. Country Analysis of Italy Introduction It is important to evaluate conditions that support or hinder the prospects for a business in a particular location while undertaking new start ups, expansion, acquisition and/or other forms of investment. Political, economic, and geographic factors are taken into consideration for evaluation and decision making. Implicit within these broad categories are the demographic and legal factors. A range of reputed published resources like the country reports of the London based Economic Intelligence Unit, the CIA World Fact Books, the World Bank, IMF and European Commission reports can provide the necessary data for analysis for all major countries. The present paper deals with country analysis of Italy, an EU member country that is in the thick of a political and economic crisis in the recent past. Political risks Italy became a republic in 1946 after the World War II and is a member of NATO and European Economic Community (EEC) in the euro zone. This country of about 60 million people with practically 100% literacy rate and dominated by the Roman Catholic faith followers, is a developed economy and has been a strong supporter of the political and monetary integration of the EU Zone countries (Anon, n.d., geography.about.com). Italy is a republic, headed by a President as the constitutional head, while the executive authority vests with the Prime Minister (also called the president of the council of ministers) (CIA, 2011). It follows the constitutional form of democratically elected government with two houses of legislature (Senate and Chamber of Deputies), the judiciary and the executive wings having respective roles. Although Italy is not a signatory to the International Court of Justice jurisdiction, it respects international legal responsibilities like most democratic nations (CIA, 2011). The country is divided into twenty administrative regions of which five regions enjoy a higher degree of autonomy. Regions are further divided into provinces, numbering about 100 at present. Each province is under the watchful eyes of a representative of the federal government. Separatist tendencies, left-wing extremism, and remnants of fascist elements have been sources of political challenges that Italy faced since inception. These risks continue even today, although they have been substantially controlled. Political parties of different hues like left-of-centre or right-of-centre and others form coalitions among themselves and with other parties to govern the country. Italy has largely overcome the period of extremist left-wing terrorism between 1970s and 90s (Dugdale-Pointon, 2007). Widespread corruption has been the bane of Italian politics and economy, and this has led to short-lived spans of governments, policies and programs. Investigations into corruption scandals have caught up with many politicians, resulting in introduction of political and electoral reforms. Scandals involving the personal life of the immediate past Prime Minister Silvio Berlusconi and the deep economic crisis led to the change of guard in November 2011, with Mario Monti replacing the former in an interim arrangement. Political uncertainty is far from over. Although he is no more the prime minister, Silvio Berlusconi wields considerable power behind the scenes, and hence is the main risk element on the political scene of Italy. Berlusconi is the major media baron in Italy, and has considerable financial and media power behind him, making him irreverent of public opinion. His government failed to adopt policies for curtailing budgetary deficit or reducing debt or implementing policies for revival of GDP growth. Berlusconi’s continued sway over the ruling dispensation is a negative factor. Economic risks As euro zone’s third largest economy, Italy is currently facing major financial problems. In May this year, the international rating agency Standard & Poor (S&P) downgraded Italy’s rating on the back of high national debt, fiscal deficit and sluggish economic growth, compounded by political uncertainties (White, 2011). Quoting Societe Generale's Vladimir Pillonca, White mentions that till 2014, GDP growth rate will be just about 0.8% year on year on the average – a growth rate that is woefully inadequate to reduce the debt ratio, which is about 120% of the GDP (May 23, 2011). Reporting for the Guardian, Kevin Yao drew attention to the comments of Ms. Christine Lagarde, Chief of the International Monetary Fund (IMF) about the uncertainty surrounding the Italian crisis, unsustainable bond rates and the threat that the Italian crisis poses for a breakup of the euro zone (November 10, 2011). This grim situation is confirmed by the comments of the new Prime Minister Mario Monti who said that without severe austerity measures, the country might go the Greece way (Reuters, December 5, 2011). Given the fact that Italy is a major exporting nation with strong capabilities in capital goods, automobiles, designer products etc., the blame for the current crisis can be squarely attributed to political and economic mismanagement. Regional disparity is also a major issue in Italy’s economic scene. According to Marco Montanari of the European Commission, the technical skills and industrial product range of the northern and central regions is superior to that of the southern part (June, 2011). This disparity presents an opportunity as well as a risk. The Commission was of the view that, “…a dramatic slowdown in total factor productivity (TFP) has hampered potential growth, thus offsetting possible efficiency gains associated with the euro. As a matter of fact, Italy’s international competitiveness has deteriorated markedly as low productivity growth has counteracted the positive effects of wage moderation” (June, 2011). The report goes on to point out that Italy’s economic performance has been consistently below the average for other euro zone areas since mid-90s in spite of attracting comparable investments. The toxic combination of political uncertainty, policy paralysis, gaps in skill sets on regional basis and the consequent factor productivity issues plague the Italian economy. Geographic risks This peninsular country spreading into the Mediterranean Sea is surrounded by several other regional countries of significantly varying political and economic conditions. Countries with major land boundaries are Austria, France, and Switzerland, all of which are the prosperous north European countries. Across the Mediterranean, Italy is hemmed in by Slovenia, Croatia, and Greece on the East/South East, and the nations of North Africa like Tunisia, Libya, and Algiers on the South, from where illegal immigration and drug smuggling pose socio-economic law and order problems. While the northern regions enjoy typical Mediterranean weather, the southern regions are located in the hot and dry tropical zone. Natural geographic risks include landslides and mudflows caused by excessive rainfall in the mountainous northern region. Because of the vast coastline, Italy faces the major problems of illegal immigration and drug smuggling, both of which are predominant in the southern region. The educational standards and technical skills of the people in this region are inferior compared to the northern part of the country (Anon, n.d., geography.about.com). Presence of Islamic and other immigrants, low qualifications and low wages are factors for planning stable business activities in this region. On the other hand, the northern region is prosperous and thriving. Conclusion Italy is a developed country endowed with democratic form of government, substantial export industries and infrastructure. Its contiguity with the European region on the north, and across the Mediterranean Sea, with countries of the coastal regions makes it a unique geographic area beset with opportunities and threats. Its political landscape has been and continues to be clouded by coalition politics, corruption and scandals resulting in long periods of policy uncertainties. Development and economic performance is not uniform throughout the country, with the northern and central regions accounting for bulk of the export-oriented industries, while the southern region is yet to catch up. Illegal immigration, drug trafficking and organized crime are major issues that threaten the social fabric, more particularly in the south. References Anon., (n.d.). “Geography, Italy”. [online]. Retrieved from: http://geography.about.com/library/cia/blcitaly.htm CIA (2011). “The world fact book”, [online]. Retrieved from: https://www.cia.gov/library/publications/the-world-factbook/geos/it.html Dugdale-Pointon, T. (November 19, 2007), “The Red Brigade Terrorist Group”. [online]. Retrieved from: http://www.historyofwar.org/articles/weapons_red_brigades.html Montanari, M. (June, 2011). “European Commission: Economic and Financial Affairs – Country focus: Italy”. [online]. Retrieved from: http://ec.europa.eu/economy_finance/publications/country_focus/2011/cf-23-06_en.htm Reuters (December 5, 2011). “Without economic plan Italy would risk Greece situation-Monti”. [online]. Retrieved from: http://www.reuters.com/article/2011/12/05/italy-monti-greece-idUSR1E7GD02420111205 White, G. (2011) “Why The Political Situation In Italy Makes Its Debt Situation Even More Frightening”. [online]. Retrieved from: http://articles.businessinsider.com/2011-05-23/markets/30085953_1_debt-outlook-debt-crisis-gdp Yao, K. (November 10, 2011). “Lagarde: Italy's political situation fuels uncertainty”. [online]. Retrieved from: http://www.guardian.co.uk/business/feedarticle/9939832, Read More