ANALYSING THE EFFECTS OF THE POLITICAL CRISIS AND COVID-19 ON ITALY'S ECONOMY


INTRODUCTION AND BACKGROUND


A political phenomenon in Italy that started in January 2021 and ended the following month was the 2021 Italian government political crisis. It covers the events surrounding the declaration by Matteo Renzi, leader of Italia Viva (IV) and former Prime Minister, that he will withdraw IV's support for Conte's administration. Renzi's party abstained on January 18 and 19, and the government secured crucial confidence votes in both the Chamber and the Senate but failed to achieve an absolute majority in the Senate.

Prime Minister Conte stepped down from his post on January 26, leading President Sergio Mattarella to launch consultations to form a new administration. Mario Draghi was sworn in as the Prime Minister on February 13. When Italy was barely making it and coping with the coronavirus pandemic and the effects on its heavily indebted economy, Italy became entangled in new political instability. Some political leaders slammed what they call an irresponsible mentality by opponents, who they felt were behaving for their gain.

Italy was finally settling into the sudden and new changes of leadership and turmoil when the life-threatening outbreak of Covid-19 clawed the country’s very own population. On January 31 2020, two Chinese visitors in Rome tested positive for the virus. One week later, an Italian man from the city of Wuhan, China, who had returned to Italy, was hospitalised and identified as the third case in Italy. Case clusters were later observed on February 21 in Lombardy and Veneto, with the first deaths occurring on February 22. The epidemic had spread to all areas of Italy by the beginning of March. Recommendations on medical ethics were released on March 6, 2020, by the Italian College of Anesthesia, Analgesia, Resuscitation and Intensive Care (SIAARTI) on the triage procedures to be used.

On January 31, all flights to-and-from China were suspended by the Italian government, and a state of emergency was announced. In February, eleven northern Italian municipalities were founded and quarantined as centres of the two most significant Italian clusters. These two clusters have been the primary source of positive cases in other countries. The quarantine extended on March 8, 2020, to Lombardia and 14 other provinces in the north and on the next day to Italy, where more than 60 million people were put on a lockdown.


IMPACT ON THE ECONOMY


The pandemic, coupled with the ongoing political turmoil, caused prominent economic harm to the Italian economy. While basic areas of public life were severely affected, the tourism, hospitality and food services industries were among the hardest hit by the restrictions levied by foreign countries on travelling to Italy and the national lockout imposed by the government on March 8.

Finance Minister Roberto Gualtieri estimated a 6 per cent GDP decrease for 2020 by April. On March 12 when the FTSE MIB index lost 17 per cent of its value in one day, the Italian stock market was among the hardest affected during Black Thursday. In some of their plants, several plants, such as Fiat Chrysler, stopped production. The government issued a shutdown of all non-essential companies, businesses and economic operations on March 21.

Economist Alberto Bisin estimated that due to borrowing and losses, the debt-to-GDP ratio of Italy will increase from 130 per cent to 180 per cent by the end of the year. Several analysts say Italy is going to fail to pay back its debt.

The effect of the political crisis and Covid-19 on various sectors of the Italian economy has been quite complex. According to a report released by the leading Italian merchant bank, Mediobanca, airline manufacturing (-22.1 per cent), oil (-15.9 per cent), apparel (-14.1 per cent) and automobile industries were the most affected sectors throughout the lockdown era (-9.1 per cent ).

The tourism industry, which accounts for 13 per cent of Italian GDP by some figures, was also adversely affected majorly due to covid. According to the new ENIT report, the Italian national tourism agency has cut foreign visitors by 58% and domestic travellers by 31% since February 2020, with a projected economic loss of EUR 24.6 billion. During the lockout period, the catering sector suffered too.

According to a report by ISTAT, the catering industry has lost nearly EUR 13 billion in the second quarter of 2020 and will ultimately experience a loss of more than EUR 22 billion for the whole of 2020. Covid-19 has also had a severe effect on the industrial sector (-15 per cent), as well as mechanical (-18.8 per cent) and domestic appliances, based on research reported by ISTAT (-22.1 per cent).

MEASURES ADOPTED BY THE GOVERNMENT

The Italian government, though themselves in turmoil, implemented a series of emergency legislation aimed at safeguarding the Italian economy during the pandemic. A host of steps have been enforced by the government, covering topics such as tax concessions and extensions, the corporate liquidity crisis and insolvency issues, measures aimed at preserving the quality of employment by the introduction of a furlough scheme, and the ban on the dismissal of jobs for economic purposes.

Based on the study carried out by the Italian Ministry of Economics and Finance, the essential government requirements for firms are:

  1. Deductions from IRAP (regional tax on profitable activity) payments for companies with sales of up to EUR 250 million in the fiscal year 2019;

  2. Non-repayable loans issued for undertakings compliant with certain conditions; tax credits for undertakings complying with certain requirements, equal to 60% of the leasing value for rentals of non-residential properties.

Corporations (joint-stock companies and limited liability companies), for which the Italian Ministry of Economy and Finance has projected savings of approximately EUR 3 billion, are the key beneficiaries of the cancellation of IRAP payments. Overall, the major winners of the three initiatives were: production firms with benefits over EUR 2.5 billion, retail and wholesale companies with benefits above EUR 2.5 billion, and hospitality and catering service suppliers with benefits over EUR 1.7 billion.

The Italian government has released a new decree-law (the 'Decree') to introduce legislation to minimise the effects of the ongoing 2019 Coronavirus Epidemic. Tax deferrals, relief and state-backed guarantees for certain borrowers are among the measures envisaged. Individuals are entitled, up to Euro 30,000, to a tax exemption of 30 per cent. Small and medium-sized enterprises (SMEs) that owe money to banks, financial intermediaries or other institutions approved to issue loans in Italy are entitled to obtain relief. It is estimated that the acts carried out in this require an investment of 25 billion euros.

The decree provides for the approval, within 180 days of the end of the financial year, of the 2019 financial statements of all Italian companies. It also requires measures for self-employed workers and other employee classes to protect salaries. Measures are generally rewarded and charged to the national social service department. They are in the tourist sector for seasonal jobs, farm employees and film industry employees. Other facilities are offered for quarantined employees. For a total of 60 days after March 17, 2020, all ongoing lay-off activity is suspended, and all workers are barred from carrying out individual dismissals of any employee for justified objective reasons.

The civil and criminal trials due to take place between March 9 and April 15 have been delayed and will be rescheduled until after 15 April 2020. All legal deadlines are postponed until 15 April for civil and criminal prosecutions. Courts can, except for urgent operations, implement measures restricting access to courts until June 30, 2020. Video or audio-conference hearings and/or written submissions and out-of-court rulings by the judge may be substituted for in-person hearings.

To minimise or exclude the responsibility of debtors for non-performance of contracts with government agencies, compliance with the restrictive steps thereunder shall be taken into account. The moratorium also extends to procedures for out-of-court agreements regulated by particular legal requirements.

REFERENCES:


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  8. Oecd.org. 2020. Wide-ranging reforms needed to ensure Italy’s economic recovery - OECD. [online] Available at: <https://www.oecd.org/economy/wide-ranging-reforms-needed-to-ensure-italy-s-economic-recovery.htm> [Accessed 21 February 2021].

  9. Legorano, G., 2020. Italy’s Government Teeters Over How to Revive the Economy Post-Covid-19. [online] WSJ. Available at: <https://www.wsj.com/articles/italys-government-teeters-over-how-to-revive-the-economy-post-covid-19-11610193601> [Accessed 21 February 2021].

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FURTHER READING:

  1. https://assets.kpmg/content/dam/kpmg/us/pdf/2020/03/tnf-italy-mar20-2020.pdf

  2. https://www.mondaq.com/italy/financial-services/909722/italy39s-economic-measures-to-mitigate-the-effects-of-covid-19

  3. https://economictimes.indiatimes.com/news/international/business/italy-approves-new-stimulus-package-to-help-revive-covid-hit-economy/articleshow/78737041.cms?from=mdr

Written By: Shubhi Pandey (shubhi221199@gmail.com)

Edited By: Priyanshi Kapoor



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