Italy’s Economic and Political Forecast: Cloudy

Italy appears to stand in ‘no man’s land’ after voting against Prime Minister Matteo Renzi’s constitutional referendum on government reform. I reference ‘No Man’s Land’ because it’s characterized as the area between two opposing forces. There certainly seems to be a chasm with Italian citizens voting to throw Renzi out, and the country’s senate voting in Paolo Gentiloni

who quickly reappointed almost all of Renzi’s ministers.   

   

It’s too

early to predict how this decision will affect Italy’s future and the country’s place in the European Union. While the government has changed hands from Renzi to the new Gentiloni government, all signs appear to point to a continuation of the old guard with the ghost of Renzi hovering in the background.  Just how and if Italian citizens will get the change they overwhelming called for will be revealed in the days and years to come.

 

Italy could be seen as a microcosm of the political populist nationalism movement sweeping across Europe and the United States.  Brexit, the election of Donald Trump as President of the United States, the rise of Marine Le Penn in France, Geert Wilders in the Netherlands and Jaroslaw Kaczynski’s  Law and Justice Party in Poland all have a common theme. The middle and working classes believe they are being hurt by immigration, the middle class is shrinking and they want their borders guarded.

 

What are the economic implications of the current populist sentiment, especially for globalization and Foreign Direct Investment (FDI)?  Discussions with our Italian business associates tell us there is no panic yet. While everyone is watching to see how the “no vote” will affect the country, our business partners aren’t showing concern at the moment. They believe the vote will not touch businesses because of the country’s economic dynamics, to which the Italian companies contribute, is really not affected by government. “The Italian business community is more concerned about the crisis of low productivity, high corporate taxes that discourage direct investment, high income taxes that limit consumption and the high cost of labor per unit of output.”

Prime Minister Paolo Gentiloni and his new administration have been given a mandate to fix these persistent problems. He must convince Italians that globalization means future growth, jobs and productivity.  Economic success can be more inclusive and can be accomplished without instituting sever austerity programs that are feared by the people.  

 

Gentiloni, like Renzi, is pro-European Union so our Italian associates and I don’t envision Italy pulling out the union within the next two years. The predicted early elections of 2018 will provide a clearer picture.