In these times of unprecedented economic uncertainty all we can
do is speculate, and with speculation its always a good idea to
have a hard look at what's going on next door. These blogs will be
looking worldwide and discussing the good, the bad and the not so
pretty economic developments that are shaping the future of the
global economy.
This week it comes as no surprise that Britain's economic
forecast isn't getting any brighter. The OECD has reigned in
predictions of growth to 0.5%, the public sector went on strike
but, as George Osborne keeps telling us, we're not as bad as Italy.
This is hardly a ray of sunshine.
Italy is in trouble and its chances to recover and become
competitive are scuppered by two things, unions and Euros.
The ability to negotiate labour contracts at a national level
has left far too much influence in the hands of the unions.
Over-zealous job security has ground the circulation of workers to
a halt and reduced labour efficiency. Businesses have restricted
their size to avoid union rules, so much so that 95% of Italian
companies employ fewer than 10 workers. What's worse is that an
estimated 15-27% of businesses exist underground as a sure fired
way of evading union rules, according to the IMF, leaving 4 million
workers completely unprotected.
The effects of the Euro haven't helped either. Running a
persistent deficit once meant a country could become competitive
through the depreciation of its currency. With this option locked
off by the Euro, Italy would have to default on its
Euro-denominated debt to recover. But this will damage its credit
rating, hitting Italian businesses hard as credit lines are
withheld.
Caught in this hard situation, things are growing desperate.
Recent crime figures and registered extortion complaints seem to
suggest that the shadow of organised crime is moving north.
Italy's new PM, Mario Monti, is due to announce financial
measures on December 5th, thought to include a new sales tax and
fast-tracking the pension age increase. But will these measures
help Italy grow out of the recession? Not significantly.
An IMF inspection team is expected in Italy within the next few
days. No date has been announced and the IMF has declined to
comment on whether assistance will be given. Their help will be
welcome, but even if a short term fix is provided, Italy will still
have to address its unions and more pressingly Brussels will have
to address the shortcomings of the Euro (within 7 days
apparently).
But it's not just up to the IMF to help out the situation. The
worst thing the world can do though is isolate Italian businesses.
Putting them in quarantine is the best way to spread the infection.
Italian companies will keep working despite the mess created by
their politicians, unions and currency (95% of businesses have
shown Italian's know how to adapt). If you are worried about
working with Italian companies, just get a quick and easy
international credit report; investigate the business and then make
a decision. In these times of uncertainty what we need is prudence,
not fear.
