Italian elections have traditionally been confusing, with one weak
center-left coalition government replacing another. But the election held on
April 13-14 was unusual for Italy, as it produced a clear result. What’s more,
that result gave a majority to the center-right government of Silvio
Berlusconi.
Berlusconi, a media billionaire, is pro-U.S. and strongly pro-capitalist.
While the forces preventing free-market reform in Italy are extremely strong, he
should at least be able to make some improvement in Italy’s economic position,
with consequent benefit to the local stock market. While sensible investors have
in the past avoided Italy, with Berlusconi in office, it might be worth taking
another look.
There’s no doubt that Italy has some weaknesses. By European standards, it is
fairly corrupt, ranking 41st on Transparency International’s Corruption Perceptions Index, below
the other major European countries (but above such investor magnets as China and
India).
Italy has a budget deficit of 3% of Gross Domestic Product, with too much
government spending at 50% of GDP, and far too much government debt at 105% of
GDP. The country had relatively slow economic growth of 1.9% in 2007.
The home to Rome also has a declining population - not in itself a problem,
but since its social security system is generous it creates difficulties in
funding Italy’s pension system. It has suffered badly in the past few years from
expensive government and expensive labor costs, particularly as it is a member
of the euro, which has almost doubled in value against the dollar since
2002.
All this would make you think Italy was a basket case, except for one fact:
it has enjoyed very considerable economic growth in the decades after World War
II and again in the 1990s. It’s a wealthy country, nearly as wealthy as
Britain, France and Germany. And it is famous for high-end design in the
clothing and home furnishings industries. Some of Italy’s medium-sized
family-owned companies are the best run in the world.
From time to time, investment in the right Italian companies has made
international investors a lot of money.
