Apr 23 2013

The Quiet Collapse of the Italian Economy

By Roberto Orsi

Please also read the updated analysis of the Italian situation in The Demise of Italy and the Rise of Chaos and in Why Italy Will not Make It by the same author.

While attention on the Euro crisis has been focusing primarily on Greece and Cyprus, it is no mystery that Italy, alongside with Spain, constitutes the real challenge for the future of the common currency, in any direction events will be unfolding.  In the relative silence of the international press, Italy’s macroeconomic situation has been showing no sign of improvement, and indeed numerous indicators portray a national economy which finds itself in a depression, rather than in a however severe recession. It is no overstatement that the Italian economy is currently collapsing.

Italy is the third largest economy of the Eurozone (after Germany and France), holds the largest public debt (over €2 trillion), which has been growing at an astonishing pace, even in more recent times and particularly as a ratio to GDP (130%), since the latter is contracting fast. How is this sustainable? Well, it is not. But for the moment, thanks to the ECB direct interventions (€102.8 billion of Italian bond purchases in 2011-12) and especially to the LTRO mechanisms, the finances of the Italian state can still be kept afloat. Italian banks have been absorbing €268 billion of liquidity issued by the ECB by means of the LTRO programme. In its essence, the mechanism is the following: because the ECB cannot lend liquidity directly to the states, except in times of absolute emergency and for the stabilisation of financial markets in the short term (as happened in 2011), it lends money to the banks, which in turn purchase government-issued bonds. Interestingly, the LTRO scheme has also become an instrument for the relatively orderly withdrawal of international investors from Italy, especially French and German, whose share of public debt has fallen from 51% to 35%, mirroring the rise of Italian banks purchasing public debt. This is an important signal, which goes in the opposite direction of an increased interdependency as would be expected from a monetary union in preparation for a political union. It is arguable that many investors are actually systematically reducing their exposure in South Europe, possibly hoping that a future breakup of the common curency will have less harmful consequences if their involvement in the financial and economy destiny of those countries is curtailed to the minimum. For Eurosceptics, it is a signal that, once all foreign investor withdraw, Italy will be left to its fate.

The truth is that the Italian state went bankrupt in summer 2011, when interest rates on the national debt went out of control, and as a result Italy lost access to the financial markets. Of course, because of the sheer dimensions of Italy as an economy and as a debtor, the ECB and political authorities in Europe have agreed to create around the country’s finances the appearance of a market, which is in fact, as the numbers above show, largely artificial. Ideally, Italy should stay on this artificial support until the economic conditions improve and confidence is restored to such a level that the country will have again access to a “normal” credit market.

However, this is not happening and there is no sign it is going to happen in the years to come. The situation of the Italian economy is simply dramatic. Recently, a study has appeared which reveals how the current crisis (2007-2013) is in many ways much worse than the 1929-1934 contraction. In the present crisis, investments have collapsed by 27.6% in the five year period, against 12.8% in the interwar depression. GDP has declined by 6.9% against 5.1%. Italy, with the second largest manufacturing sector in Europe after Germany, has lost about 24% of its industrial production, going back to the 1980s level. No data is currently showing any sign of recovery. From the beginning of this year, the country has lost over 31,000 companies. Every day 167 retail units are lost, signalling an authentic disintegration of the retail sector. The automotive sector, a crucially important one for the Italian economy, has been constantly contracting: from about 2.5 million cars sold in 2007, sales in 2012 reached only the 1.4 million mark (the 1979 level) and they are still contracting this year. Construction, the other pillar of the national economy, is in rout: the 14% slump in 2012 is only the last in a series of difficult years. Home sales have dropped by 29%  in 2012 against the already miserable 2011, to the 1985 level of 444,000 units, about half the number of 2006. Of course, the consequences of this economic disaster in terms of loss of employment are dire: unemployment is now at almost 12% and growing fast. Half a million workers have been put in stand-by and receive a state funded social benefit (cassa integrazione): it is projected that this year again the state will pay well over a billion work hours equivalent of this benefit. Needless to say, it is far more likely for all these workers to lose their job, rather than being re-integrated in the production cycle.

The Italian state has so far managed to defend its financial position by means of increased taxation, limited spending cuts and more borrowing. As illustrated above, the borrowing scheme has been engineered with the help of the ECB and the banking sector. Taxation has now reached unprecedented levels, and it is asphyxiating the economy together with the credit crunch. Spending cuts have been implemented to a certain extent, but like taxes they have a depressing effect on the economy, not to mention their unviability in a largely clientelistic, if not openly kleptocratic system.

Under pressure from the European Union, Italy has committed to a rigorous budget and it has even introduced a balanced-budget amendment in its constitution. Absurdly, the Italian state runs a surplus when public debt interest payments are excluded, but this only appears to be because, purely and simply, the state often “forgets” to pay its suppliers (the outstanding debt to private companies is in the €90-€130 billion range, depending on the criteria for calculation).

Now, it is not difficult to imagine that, in a few months, despite the new taxes, the sheer collapse of entire sectors of the economy will cause a rapid contraction of tax revenues. The Italian state cannot possibly accumulate even more debt at a faster pace (at least for Italy, the austerity debate makes little sense). Italy will simply run out of options, and it will require additional measures from the EU. Essentially, some sort of bailout. But because of the sheer size of the economy  and the public debt, this is simply impossible. In the absence of any political consensus around a radically different monetary policy of the ECB, i.e. unlimited QE, which will probably never materialise, and which will clearly not solve any of the country’s structural problems, the only realistic scenario will be that of a debt restructuring or renegotiation, as suggested by Nouriel Roubini in a precise analysis published more than 18 months ago. The collapse of the Italian state finances is rapidly approaching. It will have an enormous impact on the Eurozone and the European Union.


Note: This article gives the views of the author, and not the position of the Euro Crisis in the Press blog, nor of the London School of Economics.

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71 Responses to The Quiet Collapse of the Italian Economy

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    I’m going to highly recommend this blog!

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  23. Fab says:

    Dear Mr. Orsi,

    I forgot two other important considerations!

    1) LSE has done business ( and obviously will do ) with financial and banking industry:


    Hence, it’s mission impossible that you can tell the whole truth!!

    2) Here is another “smoking gun”:


    Best regards.


  24. Fab says:

    Dear Mr. Orsi,

    You are telling just a piece of the true story!

    Here is the rest!

    Considering the Total Debt ( public debt + households debt + non-financial private firms debt + financial private firms debt ) to GDP , Italy isn’t in troubles at all :

    http://www.gfmag.com/tools/global-database/economic-data/11855-total-debt-to-gdp.html # axzz2hoFfbO98


    USA (if you do the calculations as it should be ) and UK from this point of view are in troubles much worse than Italy and surprise, surprise, London and New York are the most important financial centers in the world but their government bonds have never been under pressure as Italian ones and it turns out that the massive sale of PIGS (Portugal , Italy, Greece , Spain) bonds started from hedge funds with headquarters in London and New York !

    What strange coincidences …!!

    Hence, it was the trigger to create a domino effect in Europe and as German and French banks had invested in a lot of PIGS bonds, then to avoid huge losses on their balance sheets, the European Central Bank ( ECB ) has intervened inventing the Fiscal Compact and in doing so, it has been able to mask a very substantial indirect aid in favor of German ( in particular) and French banks which had been buying up PIGS bonds !!

    As you can see, false premises ( not consider the Total Debt ) leads to erroneous conclusions ( the Fiscal Compact is the medicine of the evils whereas it basically serves to save the butt of German and French banks and to mask the real situation of USA and UK in relation to their total debts ) and disastrous results because it is has been inoculated a virus that causes depression in the European economy to save the elite of European finance !!!!

    Best regards.


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  28. Ricardo says:

    Isn’t this true of all Global economies to a greater or lesser extent? Ultimately it’s all going to end up in the same nasty place. The problem with the global economy is precisely that. It’s global. Countries are all interdependent and very few if any are sustainable in their own right. That is what I call an achilles heel the size of an aircraft carrier. It means that when collapse comes and it will there is zero room for maneuver. Everything will be affected over night. Food, water, energy, money supply. The key question countries should be asking themselves is “are we sustainable?”. Address that issue first. The irony here is countries like Cuba and Zimbabwe are going to be regarded as havens in the near future. Population reduction is an indisputable absolute. There is no solution with 7 Billion people. Not even close. PS Banion Scheffer I agree. Get rid of the economists! They are the fundamental problem. There solution to everything is growth. Growth for the sake of growth is the ideology of the cancer cell. Growth is death.

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  31. Banion Scheffer says:

    I used to live in Brazil since I was born in 1973 until 2006 when I left a whole life behind my back.
    The crisis started in Brazil in 1996, when the government forbidden the travellers to buy abroad in credit card…with a monthly rate, only if paid in full, and with interests and a salted exchange rate, reaching the worse on 2001 with the Twin Towers attack!
    From there the world goes totally mad!
    In 2006 I came to Europe (Madrid) searching for a better life to my family…
    After 21 days at Madrid I came to a conclusion… Live in the old world is far more easy than the new world.
    At June 2006 me my wife, two kids and two brothers in law, left the “samba” world behind…
    After 6 years I started to understand that the interest of our politicians are to defend their friends.
    Sadly we are marching towards a new War!
    The Italian government search to maintain a high level of Standard and Poors rising the taxes…
    The right road are give value to the internal product, freeze some prices for a while, create devices to increase productivity and consume… The wheel doesn’t spin if the commons doesn’t have money to spend…
    I really don’t understand what a heck the economists exists, because seems to me the most useless type of person!
    The riches get more rich if the commons are able to live their lives with a little peace of mind.
    Greed are the worse thing in this world!
    Peace to all!
    Banion Scheffer

  32. JJitaly says:

    The reality on the ground in everyday life is that small businesses can’t survive with the level of taxation on having employees. Being self employed is also ridiculously expensive, so this stops any low paid self sufficient people from starting work, and drives their activities into the black economy. The structure of the financial system in Italy is such that no one is rewarded for innovation or creating work , the standard assumption is that the people must be cheating so lets tax them more. The other problem is that the entire country is rigged towards public institutional workers, who get paid well for doing very little. (Walk into a local council building and you can witness it yourself). The entire economy is based on nepotism and a non developmental mentality. Politicians are completely detached from the everyday reality of the systems and economics normal people have to deal with, so will probably not understand how to fix the actual macro structure so it benefits the micro economic situations of the population, which in turn will drive the macro better. The focus is on placating markets not on placating the population, big mistake in my mind. Italy needs to completely rewrite its economic model and expectations. E youth are already lost here, they don’t want to work, as there is little point, the general feeling on the street is that the government will just steal back through strange taxes anything they make.

    • Ricardo says:

      Seriously. Why do we need banks anyway? Why can’t Governments simply become the prime lender. They could regulate loans through the tax system (similar to HELP debts in Australia which work very well) I’m not a Muslim but it seems to be that Islamic law on loans is very fair and equitable in this regard. This might explain why the Western Media are so quick to demonize Islam. In many countries electricity and water are run by the Governments so why not banking? The problem with the profit motive is precisely that. It’s a greed based screw everyone system. If you ignore the mob then the mob will rule. There is a huge difference between capitalism and entrepreneurship. One is about greed and profit at any cost. The other is simply about running an honest family business. Providing a good product or service and having a reasonable living. This is the opposite of capitalism. Incidentally the one man made invention that signed our death warrants. The publicly listed company. There is something fundamentally wrong with our world. We trot out Christian principles on Sunday (if we even bother) and shaft everyone for the remaining 6 days of the week. It’s all wrong. It’s anti Christian, anti Islam and any other religion you care to mention. Finally came the death of common sense…..

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  34. M. says:

    I think the author simply wants to be negative about Italy, which is quite easy now, but all the number mentioned represents the status quo. Any forecast? oh yes, Roubini, 18 months ago he was forecasting the rapidly approaching collapse of Italy… rapidly. Mike is right, it’s already looking funny today.
    Of course, LTRO is playing a big role, but like all the others QE mechanisms in place. The search for spreads was the main driver of the recent tightening of BTPs and yes the macro picture has not changed… but we all live in an artificial support.
    “The LTRO scheme has also become an instrument for the relatively orderly withdrawal of international investors from Italy, especially French and German”… well it depends on valuations, it’s the market. Ask Allianz/BNP Paribas about their stakes in Italian financial insitutions and, as a consequence, in Italian govies.
    Maybe Roberto Orsi is just one of the Italians living abroad, a pessimistic one standing by the river.

    • GCC says:

      Mr Orsi seems to play well in the hands of the M5S (Movimento 5 Stelle) of Beppe Grillo.
      Being negative, unfortunately, is the only way you have to evidence the bads of the country. There is nothing positive in there. I am living outside Italy because I cannot pay my living there, even working as hard as I do in the UK.
      The great Berlusconi is a real macho: he screwed 60 millions Italians very well, indeed…!

  35. Rêverie says:

    Apologies for my new remark.
    I just remembered a special report published by “The Economist” on the 21st Jan 2012, entitled “State capitalism”. There in my opinion you can find clearly expounded the major issues that Italy QUICLY needs to addresses.
    for your convenience, a quick abstract:
    “But state capitalism nevertheless suffers from deep flaws. How can the state regulate the companies that it also runs? How can it stop itself from throwing good money after bad? How can it remain innovative when innovation requires the freedom to experiment? MIT’s Mr Steinfeld argues that state capitalists are learning to play “our game” by listing their shares and engaging in mergers and acquisitions. That, he says, makes them a “self-obsolescing” ruling class. But state capitalists are surely playing “our game” in order to strengthen their political positions.
    The future shape of state capitalism will be determined by two things. The first is rent-seeking on the part of the corporate elite. Management theorists have long agonised about the “principal-agent problem”—the tendency of managers to run companies to suit their own interests rather than the interests of their owners or customers. Under state capitalism this problem is as acute as anywhere. Politicians are too distracted by other things to exercise proper oversight. Boards are weak and disorganised. And the company’s mission tends to be a confusion of the commercial and the social. […] But state capitalism’s BIGGEST FAILURE is to do with liberty. By turning companies into organs of the government, state capitalism simultaneously concentrates power and corrupts it. It introduces commercial criteria into political decisions and political decisions into commercial ones.”

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  37. Sandro says:

    All I read is … opinions … anyone with the crystal ball???

    • Techedge says:

      They’re facts, italian economy is not anymore.
      Search for data from accounted istitutions and see for yourself.

    • GCC says:

      Opinions? Wake up! These are sheer facts. The complete fall happened with the Berlusconi 9and his mobsters) advent. Whoever negate it is just blind, deaf and … welll… probably with no much brain…!

    • Chris says:

      Well, you could say that these are only opinions, but the thing is, more and more facts point towards the unsustainable nature of the Italian economy, and also the Spanish. With youth unemployment reaching record levels, coupled with no signs of improvement or viable solutions, I can guarantee you that the next crisis will come from one of the two states.

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  39. Rêverie says:

    Hi All,

    In my opinion, Italy needs to avoid further fiscal drags, seriously clamps down on politically corruption, cuts political expenditures and revives its anaemic economy.

    In most of the world, as it lastly become in Italy, the best way to make money is not to come up with brilliant ideas and work hard at implementing them, but to cultivate a government connection. Such cronyism is bound to shape public attitudes about a country’s economic system. This is to be strongly opposed/countered.

    When asked in a recent study to name the most important determinants of financial success, Italian managers put “knowledge of influential people” in first place (80% considered it “important” or “very important”). “Competence and experience” ranked fifth, behind characteristics such as “loyalty and obedience.” This is ruinous, fatal.

  40. Heinz Stiller says:

    The latest comments by the Bank of Italy on the DEF (Documento di Economia e Finanza) speak another, more objective and less panicky language. Some leading indicators give reason for hope.
    Of course, it all depends on what structural reforms Italy is willing to do. And in hardly any big European country, including France, there is more room and more reason to undertake such reforms. The labour market rules are one single big, bad joke, and the same holds true for many other fields of the economy, too.
    Is it necessary to mention tax evasion??
    Taxes as a whole are high, but by no means exceptional, on a comparative European basis.
    But let’s focus on the lower percentage of foreigners holding Italian government debt.
    Mr. Orsi is correct maintaining that the declining percentage makes an Italexit somewhat easier to digest for Europe. But, at the same time, lower numbers of foreign debt holders bring Italy more into a situation similar to that of Japan, step by step, where more than 95% of gov. debt is held by Japanese.
    This, in turn, is the main reason for Japan’s low bond yields. Although Japanese debt is around 245% of BIP.
    So, the ECB policies are no longer the sole reason for lower BTP yields.
    Italy is far from going over the cliff by necessity.
    And what concerns the likes of Roubini, Krugman, etc., just look how many times they have predicted the imminent collapse of the Euro over the last years. So far, they have been proved wrong so many times. It’s time to stop taking them serious.

  41. Andrea P says:

    Hi Roberto,
    Your economical analysis is looking grim from many angles, but it is a realistic one. GDP is falling down so increasing dept and unemployment. The reality is simple, Italian young people can not find jobs and old ones will soon loose part of their pensions because no much money is left in the state pockets. Small and medium size entrepreneurs are clearly in an economical battle with their own finances strangled by high taxation and a fall in profit. Does austerity will fix this situation when it is partly responsible for augmenting it? And what about the well publicized growth? A realistic EU plan looks rather far from being agreed as discussed in The Economist some time ago. In the meanwhile foreign banks are pushing out their exposure from public debt shares leaving the economical burden to the state itself.
    I hope to look back at this article (maybe in 2 years?) and laugh about it, although I am not that certain anymore….

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  43. Rêverie says:

    Just a quick Post Scriptum.
    Italy doeas really pay for past errors, as well as lack of competitivity, meritocracy, and a State subject to the rule of law, transparency, political accountability.

    The system is convoluted. Instead of having a competitive economy, Italy has an economy based on patronages and lobbies, protected by lawlessness/anarchy. Only interested in perpetuating itself..

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  45. Rêverie says:

    Just to provide with some figures…and refraining from catastrophism—over the last 13 years , Italy’s per-capita GDP has dropped 4%, the debt-to-GDP ratio has increased to 120%, and taxes as a share of the economy have increased to over…43.4% (not to mention the main rate of corporate tax ). the total tax-to-GDP ratio has oscillated above the 40 % level throughout the 1995-2008 period..
    Italians are not afraid of sacrifices, maybe,…but the more relevant question is why a reasonable alternative to mr bunga-bunga man does not emerge…?
    lack of competition ….that’s the “apical”…issue to be – QUICKLY – addressed ..
    wait and see

    • Techedge says:

      You should know that an alternative did emerge (M5S) but, as you underlined in the post below, the actual old politicians just want to keep their privileges at all costs, perpetrating their crimes against italians. They’re fighting a strong media war against M5S and it’s leader, saying for example they’re unexperienced. Well, if the experienced, and criminal, politicians brought Italy in the actual situation, i prefer the honest unexperienced people all life!
      Italian people have to report their politicians for crimes against humanity and declare the odious debt.

    • J.M. says:

      Mr bunga bunga as you call him has had three prostate operations so he can do little bubga bunga. You area victim of press propaganda.

  46. This is a succint and timely piece. Mike is brave to say that Nouriel Roubini is wrong. Especially when Italy is experiencing such high debt/GDP ratios, reduction in output, political uncertainty, recession and high unemployment. In Europe we have twenty seven million people out of work. Youth unemployment in Italy is in the high 40%s. If this is a ‘recovery’, then we’re all in deep trouble. Attacking the messenger on his credentials is also not an actual argument. Thankfully the days when economists were the only source of authority and held in awe, are over.This recession is not some academic treatise. It is way beyond that at this stage.

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  49. Alec says:

    I agree with Mike. Let us see where things are in 2 years’ time in Italy. (And whether Mr. Roubini will still be considered a prophet or not).

    As for the news that “the Italian state went bankrupt in summer 2011” I have never read that anywhere before today.

    • Good says:

      You’ve never read that but it is true

      • Dario Ricci says:

        Gosh… I’m italian and as the best stereotype I’m sly, not trustable and fucking pasta eater.. but please let me say… how many bullshits I’m reading.
        Yes we have a lot of problems, but it’s not true that we ever went bankrupt.
        At the same time please remember this: Italy is in Europe and as you know, all countries.. i repeat ALL countries have to pray that Italian economy get better in the next future.. without Italy Europe won’t have a future.
        Just other things not so popular: Italy with all its problems still have great products and knowlodge and can count on “asset” as agroofood,handcraftery, scientific and medical research handmarket that are still excellence in the world.
        At the same time it’s true that our country is very indebted but family and private debt rates are one of the lowest in Europe.
        I mean… we all know all the shit and crazy choiches taken by our politicians in the last 20 years: not accetable at all. And I can understand that we looks just a “funny” country. But believe me there’s still a hope.

  50. valentin says:

    Italia economy shrink in nominal terms and unemployment rate soars. Many market participants are aware of the gap between falling yields of Italian government debt and economic fundamentals. The ECB intention to keep the euro at any price is the driving force of Italian debt market. Not the economy fundamentals.

    I find the paper quite relevant to relevant to Italian reality. It is hard to see any positive developments in both domestic and external demand. The political crisis makes things even worst.

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  52. EK says:

    “The Italian state cannot possibly accumulate even more debt at a faster pace (at least for Italy, the austerity debate makes little sense).”

    This sentence is misleading. It would be perfectly convenient to increase debt at a rate X, as long as this injection of money is able to induce GDP growth at a rate Y, where Y>X. In fact, this measure would increase the denominator of the Debt/GDP ratio. Naturally, to do that the state would need to sell bonds at a low interest rate, which is unfeasible as long as banks will buy bonds like any other buyer would, according to the LTRO program. So? Well’ quite obviously the point is that the ECB should be able to make direct purchases. Like any other central bank on this planet.

    Therefore, the “austerity debate” would seem to make a lot of sense in Italy, like in any other European country.

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  54. Mike says:

    This post is going to look quite funny in two years’ time, if the Italian economy has recovered due to structural reform (also running under the label ‘austerity’ these days)—just like the referenced article by Roubini (precise analysis? Really? Published in the FT?) is already looking funny today.

    Anyway, given the author’s interest in things that don’t exist (social sciences epistemology?), this ‘article’ doesn’t really surprise me much. Also, how does a background in ‘International Relations’ and ‘Critical Theory’ qualify one to publish on essentially macro-economic topics?

    What a shame about the standards and the public picture of the LSE. These titbits of speculation with a few statistics sprinkled here and there really make me depressed.

    • Giacomo says:

      if you knew what is critical theory probably you would shut up. My point is that you should attack the arguments, not the background of a philosopher that as a philosopher is entitled to discuss everything.

    • Luke says:

      The economy is too important to be left to the economists!

      • John says:

        Agreed! The economics of fiat currency and infinite growth with finite resources will lead to the total destruction of our planet. Economies should be based on energy and sustainability with a panel of eminent physicists deciding what should be done or shouldn’t. The system will collapse. It’s a mathematical certainty. All they are doing now is kicking the can down the road. Well that road ends in a very steep cliff.

    • M Kerr says:

      I suggest you read today´s Telegraph (24/06/2013)… great article on iminente collapse of Italy from an Italian banking source, funnily enough!!

    • mool says:

      I don’t think you will be laughing in two years time.

      Basta ‘La Casta’: No End in Sight to Italy’s Economic Decline

      The truth is that Italy, despite being the third-largest economy in the euro zone after Germany and France, finds itself in dire straits, having been in decline for years. Its GDP has dropped by 7 percent since 2007.

      The last few years, says Gianni Toniolo, an economics professor in Rome, represent “the worst crisis in (the country’s) history,” even more devastating that the period between 1929 and 1934.

      The government has reduced its growth expectations for the current year to minus 1.3 percent. The Bank of Italy, the country’s central bank, is even more pessimistic, forecasting economic contraction of 1.9 percent.

      But economic growth only tells part of the story. More than half a million industrial jobs have been lost since 2007, and 15 percent of the country’s industrial capacity is gone, says Luca Paolazzi, head of research for Confindustria, Italy’s leading industry association.

      Some sectors have lost even more capacity, with the automobile industry having declined by 40 percent. According to Paolazzi, Italy is experiencing an “unprecedented process of deindustrialization.”



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