Productivity decline is Italy's real crisis, says IMF

By Lorenzo Totaro  |   2008-11-22  |     NEWSPAPER EDITION

THE Italian government should tailor any economic stimulus to counter the global slowdown to the country's "specific circumstances" such as declining productivity and Europe's highest debt, the International Monetary Fund said yesterday.

"The impact of the global turbulence and the ensuing global slowdown is affecting the already-weak economy," the IMF said in a statement published after its officials concluded a mission in the country. "Some near-term financial and fiscal responses are warranted but such actions should be tailored to Italy's specific circumstances, especially its high public debt."

The euro region's third-biggest economy slipped into its worst recession since 1992 in the third quarter as the fallout from the year-long credit crisis choked growth, Bloomberg News said. Next week the government will present an 80- billion-euro (US$101 billion) plan to support consumers and companies. Finance Minister Giulio Tremonti said the package won't increase the debt, currently 104 percent of gross domestic product.

"Beyond the present cyclical slowdown, the real economic crisis confronting Italy is the decline in productivity over the last decade, which has spawned stagnating incomes, rising unit labor costs and tepid growth," the IMF said, adding that the government should complement "short-term action with a critical mass of productivity-enhancing measures."

Any fiscal stimulus will be limited by Italy's "large debt, spiking spreads over bonds, and the prospect of debt issuance rising globally. Delays in adjustment will likely raise interest costs and undermine confidence," the IMF said.

The spread, or premium that investors demand to buy Italy's 10-year bond instead of a similar German bond, rose to 125 basis points on October 31, the highest since the start of the single currency. Italy's economy will contract 0.2 percent this year and 0.6 percent next year, the IMF has forecast.