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Performing in the new global economy: Challenges for Italian companies, regions and the country itself

18th CEEMAN Annual Conference
Italy - Naples | 2010

Before embarking on my subject, let me tell you something about myself.
Although I grew up in Trieste, none of my four grandparents are Italian. Moreover, they all come from different countries.
Unfortunately, they did not teach me all the languages that they spoke. My father spoke German to his family and my mother spoke Greek. However, they taught me only Italian. Besides, they did not teach me the Trieste dialect but the kind of Italian that you would learn when you are not growing up in an Italian family.
My topic is Italy’s performance in the new global economy. I am going to touch upon three points. The first one concerns the characteristics of the recent economic crisis. The second question is whether the crisis is over. The third is “Where does Italy stand at the moment?”
Let me remind you that the economic crisis started in the summer of 2007. It had some particular features. First of all, it was a systemic, not an asymmetric crisis. Virtually all countries were affected by it. It was not asymmetric like the first oil shock at the beginning of the 1970s when the Western countries suffered a huge fall in GDP and increased unemployment, whereas the OPEC countries registered high economic growth.
This crisis was triggered by a terrible demand shock, whereas the oil shocks of the 1970s were caused by supply shocks. When there is a demand shock, there is also a decrease in output and an increase in unemployment, coupled with falling inflation. On the other hand, a supply shock goes hand in hand with a decrease in output and rising unemployment, but this is coupled with soaring inflation. It is a different phenomenon that needs to be diagnosed soon in order to come up with appropriate policy interventions.
The current crisis started in the financial markets, particularly those in the US. It occurred after the bursting of the speculative bubble in the American housing market. It was related to the so-called sub-prime mortgages. You know that the financial turbulence did not limit itself to that country because the system of derivatives that was built on these mortgages made the whole financial market extremely volatile. This resulted in a dramatic reduction of liquidity and a global credit crunch. Because the financial markets are global, the crisis could not be contained in North America. After a while, it spread all over the world.
The worst moment occurred after September 15, 2008, when a number of banks collapsed, including the Lehman Brothers. I remember what happened in Europe on October 12, 2008, when Sarkozy feared that the stock exchange would not open again the following Monday. He tried to convene all European leaders and convince them to do something together in order to fix the situation. One of the outcomes of those European policies was the decisionthat all bank deposits would be guaranteed by the state. As a result, people were no longer afraid that some banks would be unable to pay their customers the money that they had deposited. Additionally, it was decided that bank assets would be saved. If necessary, troubled banks would be nationalized.
Other measures were also adopted such as the decision to abandon the market-to-market system.
The credit crunch was addressed by central banks all over the world, sometimes in a very systematic and coordinated way. The idea was to restore liquidity after it had all but evaporated. Interest rates were reduced and are still very low. By March 2009 the worst period of the financial crisis was over and the situation began to improve.        
How did the financial crisis spill into the real economy? First of all, a financial loss leads to a reduction of one’s ability to consume. Also, there was a fall in revenues. People were losing their jobs or their salaries were reduced if they were lucky enough to keep their jobs. Companies were unable to obtain credit for their operations. All that caused a reduction in consumption and investment. As far as Italy was concerned, companies could not export their goods just as they could not find customers inside the country.
Thus, a recession began in 2008, approximately a year after the beginning of the financial crisis. As you know, a recession is defined as a fall in GDP in two subsequent quarters. Italy and Ireland were the only countries in the Euro area that had a fall in their GDP already in 2008. In that year, the German economy was still growing and so was that of the US. However, in 2009, all rich countries experienced a dramatic recession. On average, GDP fell by 4.1% in the Euro area. In Italy, that fall was 5.1%. The recovery started around the second half of 2009. I think that the crisis in the real economy is now finished. Some people think that there is still a lurking danger but I am more optimistic. The worst moment for the real economy is over.
What were the policies that were adopted in the real economy? A few weeks after Obama was elected, he adopted a so-called fiscal stimulus in the amount of USD 700 billion. Germany and some other countries followed suit.
Italy’s stimulus package was relatively modest despite the fact that other European countries were telling us that we should increase our public spending in order to counterbalance the reduction in private spending.
The main tool for the coordination of fiscal policy in Europe is called the Stability and Growth Pact. However, the coordination there was not as good as in the area of financial and monetary policies. That is understandable. In Europe, we have 16 countries in the Euro area whereas the other countries are trying to adapt to the Euro club in such a way that they will be able to join it.
This means that we have already an instrument of coordination. On the other hand, the Stability and Growth Pact, which is meant to be the primary coordination tool, is not working well. It was badly conceived in the first place as it does not distinguish between a demand shock and a supply shock. In a supply shock, you have to reduce deficit spending, whereas in a demand shock, especially if it is of a systemic nature, you should step up your deficit spending.
Yet, this distinction is not made by the Pact. Consequently, the reforms that it is discussing are not those that we need.
Another market that was critically distorted is the labor market. First, there was a significant lag between the financial crisis and the crisis in the real economy. Now there is a lag between the economic crisis and the crisis in the labor market. When recession strikes, it is essential to understand how permanent it is going to be before letting people go. For that reason, employers tend to wait and see how things will turn out before making their employees redundant. This explains why joblessness trails behind the onset and the end of a recession.
Different countries followed different tactics with respect to redundancies. The US has a very flexible labor market. Therefore, they started letting people go right away. The unemployment rate rose to 10%. It is now declining but very slowly, compared to the recovery in the economy.
In Europe there was very little firing. In Germany and Italy, we resorted to temporary lay-offs. People who fall into this category are not officially considered
unemployed. In Italy, they received 80% of their usual salaries and maintained
most of their purchasing power. A rotation system was sometimes used so that
48people worked three days a week. This is a form of “flexicurity”. In this way,
when the recovery starts, rather than looking for new people, you can rely
on your regular employees. Of course, the downside to this is that your labor
productivity falls. That is exactly what we observed, not only in Germany and
Italy, but also in all European countries that adopted this method.
Is the economic crisis finished? To make a long story short, the answer is that it
is over in the financial markets and in the economy, but not in terms of the high
unemployment rates. However, in the spring of 2010, a new crisis emerged in
the European public sector. You remember what happened in Greece, as well
as in Portugal and Spain and to some extent in Ireland. These are sometimes
called the PIGS countries. In Italy, we tend to believe that the “I” actually stands
for Italy, even though it is for Ireland. In any event, this is a totally different type
of crisis. What happened was that in 2007 and 2008, there were strong interventions by the public sector in order to save the private financial markets. As a
result, the crisis became one of public debt more than anything else. Greece
was a very typical case, having a debt level of more than 100% of GDP, plus
a weak economy and low competitiveness. It also has a large and inefficient
public sector. Our countries also have corruption, not only in the private sector,
but also in policy making. Politicians lied about the level of public debt. It is not
hard to understand why speculators try to avail themselves of situations of this
kind. As a result, the spread between the profit on German and Greek government bonds is enlarging. At the end of the day, a country like Greece ends up
being unable to pay back its debt and needs to restructure it.
The European Council made a very important decision on May 9 this year. It
was agreed that a substantial amount of money would be spent to fix the difficult situation in the PIGS countries. In particular, a huge credit line was given
to Greece. As a result, the financial markets have calmed down. After falling
against the USD, the EUR stabilized and started gaining momentum. Yesterday, one EUR was worth USD 1.34. I think that the markets will have ups and
downs as usual but there are no symptoms that indicate that we are going to
have the same kind of trouble again.
As for the real economy, I think that there are some good opportunities. Perhaps some countries are still dealing with the effects of the shock and some
of them are in a better situation than others. For example, Spain and the UK
are worse off than Germany. Nevertheless, the crisis is not systemic any more.
There are countries, such as the BRIC group, that are performing very well.
China’s estimated GDP increase in 2010 is 10% and India is also close to that
figure. Even Russia is expected to grow at 4%. It is also very important to note
that international trade is increasing and the expected figure for this year is
9%. Remember that last year a 10% fall was registered in international trade.
This means that there are opportunities for those who can catch them. Currently, the opportunities are mainly in the industrial sector as it is doing better
than the service sector. Also, big enterprises have better opportunities than
small ones. Unfortunately, Italy has few large corporations and they do not
always receive the treatment that they should. On the other hand, we have
a lot of good small and medium-sized companies that are doing quite well.
There are good opportunities for countries like Germany, which were able to
step up their productivity in the past 10 years. As a result, the labor cost per
unit of output fell. In Italy, the opposite happened: we have an increase of
labor cost. Wage moderation has not been successful and wages rose even
as productivity declined.
To conclude, I would say that we need to enhance our competitiveness in
order to be able to take advantage of the opportunities in the global economy. This is true of all countries, but it is particularly true of Italy. It implies that
we should boost our productivity and stem the rise of wages. Boosting productivity will be easier in the central and northern parts of the country, less so
in the South. There are many things that are missing in the South, including a
good infrastructure. The roads are not as good as they should be and there
are few airports. And railroads are not appropriate for high-speed trains. To
develop that part of the country, we need the public sector to intervene. That
will take time and money.
As you know, the Maastricht criteria require the Euro-zone members to keep
their public debt below 60% of GDP. Yet, Italy’s is twice as high. And instead
49of falling, it is rising. This means that there is no public money. We have to
do something about that even if it implies an increase in the economic gap
between the North and the South. There are various things that can be done.
There are good enterprises that can cooperate and produce economies of
scale. I also think that fiscal federalism can help. The current government is
a strong believer in fiscal federalism and I think that it can be put to a good
Italy is beginning to recover but it is returning to its pre-crisis situation which was
characterized by medium-range stagnation. We will return to that unless we
can innovate. Also, if we want to be productive, we have to work more. We
have to work more hours in a week, more weeks in a year, and more years in
a lifetime. Finally, we have to put more people to work as we have too many
in our countries that are not contributing enough. Our female employment
rate is the lowest in the European Union. We cannot allow this to continue. If
the quality of human capital in men and women is the same - and I believe
that this is a correct assumption - there is no reason to have more than 60%
of men and less than 40% of women in the job market, which is the current
situation in Italy.

18th CEEMAN Annual Conference: New Global Performance Challenges and Implications for Management Development
September 2010
Published from:
Fiorella Kostoris, Performing in the new global economy: Challenges for Italian companies, regions and the country itself, (University of Rome La Sapienza),
Accessed: June 24 2019,
Available at: http://ceeman.lecturehub.com/lectures/234/2010_ceemanac_caserta_kostoris_pnge
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