Italian Crisis: could Italy be the next Greece?

The Greek crisis and debt are problems that are affecting another countries, including Italy that has a debt more than six times superior than Greece's. So, the Italian problems are only caused by the Greek contagion effect?

the ghost of the crisis is a serious threat to the future of the Italian economy

It's true that Italy managed its fiscal affairs better than Greece, during the crisis, but Italy has a chronic problem, well before to the current crisis, even before the euro: the high debt in percentage of GDP, the deterioration of its international competitiveness and specially the anemic growth, almost stagnation, very prejudicial for the european union, specially because Italy is one of the biggest economies of the euro area.
So, if the Greek contagion would be controlled, the Italian vulnerability to external adverse shocks remains very high.

To avoid this catastrophe, Italy should apply a program to rise its primary balance (at least 4 percent of GDP) and implement a real devaluation vis-à-vis Germany of at least 6 percent through wage cuts and far-reaching structural reforms. Comparing with the programmes implemented in the other PIIGS and in other european countries with indebtedness problems, this seems to be a very easy and light program.
Italy suffered the same that Greece and the other PIIGS: an optimistic boom after the euro adoption. The interest rates of both countries fell to near the German level (the lowest in the euro area), the consumption and the speculation in real estate sector increased a lot.
Despite Italy and Greece decreased their deficits and debts after the euro adoption, the situation deteriorated a lot, after the beginning of the current crisis.

Last year, the Italian debt as percent of GDP was 115,1, and the European Comission's predictions point to an increase to 128,5 in 2014.
Even if the public revenue can cover this indebtedness, the interest costs are also a problem, that will increase their debt above the GDP growth. So, the debt will increase larger each year, unless the country turns the primary balance deficit into a surplus.
Which solutions can Italy find to resolve this problem?
In 1990s Italy avoided an debt explosion by the moderation of expenditures and the tax measures in order to increase revenue.
The lower fiscal deficits and the higher private sector savings, could stabilize the external balance. In the 90s Italy presented a surplus in its current account, and an average current account defice of 1.6 percent of GDP since 2000, that was very modest comparing with the Greek average of 9,1 in the same period.

The Italy could avoid the same problem of Greece, because its domestic demand didn't increase so much, and didn't receive so many foreign investment during the boom, avoiding an speculative bubble.

The investors concentrated their atentions more in Greece, increasing its bond yields much more in Greece than in Italy, with an increasing difference since the current crisis had started.

But Italy presents other big problems that are strangling its economy: the loss of competitiveness, against the western powers and also against some emergent economies, caused by an increase in the unit labour costs over the productivity and a fall in total factor productivity, that is provoking the economic stagnation.

The main causes for this, pointed by many authors are:
•labour market regidities and dual labour market;
•average small size of the business made by the companies;
•average small size of the companies theirself, causing problems in the harnessing of the economies of sale;
•defective and excessive regulations;
•inadequate public services;
•insufficient competition in backone services;
•economic and social problems in the South: big differences in economic an social indicatores between the South and the North;

The loss of competitiveness are affecting very negatively the economic performance: from 1998 to 2008 the italian exports increase was the slower of the european union, and the country are loosing some markets for its exports and the export quotes are decreasing very much.

The italian problems that persist in since the end of the 20th century are now worst, due to greek crisis, and the incapacity of the european union solve this efficiently.
This situation is very prejudicial for the Italy's economic health, and the predictions for the evolution are desolating.
The bankruptcy risk around the italian economy is increasing, caused also by the deterioration of the european and global economic's health.
The most worrying risk, is the continuation of the lost of competitiveness, against Germany and its direct competitors in the export sectores and markets. This problem can compromise the possibility of economic growth for Italy.

• Possible solutions:

Italy shouldn't wait for the heart attack to apply some measures in order to avoid this situation.
- As I said before, Italy must increase its primary balance by 4 percent of GDP to ensure that its debt in percentage of GDP begin to decline gradually;
- Italy must cut in its unit labour costs and enact stuctural reforms in order to recover its loss of competitiveness.
- Italy must implement structural reforms, specially to remove rules that create a dual labour market;