To describe the Italian economy and the country system, in relation to foreign investments, has never been more difficult. Negative factors in the overall economy have highlighted a series of areas which, over time, have become critical and the numerous attempts to put the situation right have failed to achieve the desired results. The overview is therefore quite serious, although Italy was improving its competitiveness just before the credit crunch hit the world economy and seriously derailed these efforts.
Several attempts have been undertaken to stimulate the European economies, including efforts to attract foreign investments, but with little result. From 2010 the slow uptick registered in the countries affected by the crisis has been rather uneven, leading to fears of a double-dip recession, after a partial economic recovery. This possibility still hangs in the air in Italy, where domestic demand continues to be weak and the risk of sovereign debt is higher than elsewhere. Weak economic growth associated with public debt and political and regulatory instability, has contributed to relegating the Italian economy to the bottom tier of Western economies1.
In the framework of slow recovery, Italy is finding it harder than other countries to kick-start the economy despite growth in GDP in 2010 of 1.3% after a crash in 2008, when GDP fell by a massive 5.2%. In 2011-2012, compared to the rest of the Euro zone, growth in Italy is expected to be lower.
Foreign investors, especially at a time like this, tend to look to safe havens and the most solid markets, keeping away from markets with low liquidity. The uncertainties relating to the sustainability of sovereign debt, recently accentuated by speculation, driving up the spread of Italian bonds, and the inability of politicians to carry out structural reforms, have made the country less attractive to foreign investors.
After the recession, activity in Europe has grown for the sixth consecutive period of 4-months, but Italy has been playing a marginal role, with advantage to more traditionally attractive countries for foreign investors such as the UK, Holland and France, countries with more solid economies (Germany and Sweden) and countries with better long-term prospects such as Eastern Europe. Even Spain seems to be fairing better than Italy.
The level of attractiveness of the Italian market in terms of investments is shown by the flow of direct foreign investments (DFI). OECD data below shows a net export of capital for each year and particularly for the period 2006-2007 with over 60 bn. Euro leaving the country only about Euro 30 billion being invested in Italy from abroad. However, the latter figure is rather unusual, since the level of direct foreign investments in Italy is generally about Euro 15 billion a year. Over the last ten years, Italy has shown a modest capacity to attract foreign investments despite the positive signs before the worldwide crisis. In the last year for which data are available, foreign investments in Italy recovered from the low point in 2008, but the situation remains poor. The lack of faith in the Italian market led to a fall in foreign investments both in 2010 and, above all, at the beginning of 2011.
In this up-and-down situation, the Index of Italian competitiveness (based on the price of manufactured goods) drawn up by the Bank of Italy is an interesting indication of trends. Where 100 is the level for 1999, it can be seen that countries like the USA, Germany, France and UK have gained competitiveness in global markets (shown by a decrease in the Index) whilst Italy and Spain lost competitiveness fairly continuously until 2009. Last year and during the first months of 2011 Italy improved its competitiveness, hopefully the start of a positive trend.
A further indication of competitiveness is the Global Competitiveness Report by the World Economic Forum. In overall terms, Italy is 48th after Spain and Portugal, despite the highly developed system for the production of goods and services and the size of the market, enabling economies of scale. Leaving aside the position in the table, which is the result of weighting different phenomena, of interest is the way the Report highlights critical areas and weaknesses as seen by foreign investors which, in the case of Italy, are the complexity of the economic system and its excessive degree of bureaucracy (confirmation of these commonplace complaints about Italy).
The inefficiency of the state bureaucracy is the biggest problem faced by foreign investors, followed by the difficulty of gaining access to loans, which more than doubled in 2008 compared to 2007. Poor infrastructure and, above all, a tax system that penalizes investors, are further complaints. The employment market also seems too rigid whilst the financial markets are not sufficiently developed for investors needs. The instability of political institutions is another element penalizing competitiveness, as shown below, where it appears as the most critical factor. (...)