Country Report Italy October 2009

Summary

Despite the severe economic slowdown, embarrassing allegations about Silvio Berlusconi's private life and his judicial problems, the Economist Intelligence Unit expects his right-of-centre government to remain in office beyond 2011.
Government cohesion and effectiveness will be hindered by divisions in the ruling coalition, but Mr Berlusconi has a comfortable parliamentary majority and the centre-left opposition is in disarray.
Italy's poor international standing is unlikely to improve under the current government given the level of international media attention surrounding allegations about Mr Berlusconi's personal life and his judicial problems.
Our baseline forecast is that GDP will contract by 5% in 2009 and recover only gradually in 2010-11.
The fiscal deficit is forecast to rise to 5-5.5% of GDP in 2009-10 and to reduce only slightly in 2011. The public debt/GDP ratio is expected to rise from about 106% at end-2008 to about 120% in 2010 and 2011.
After a sharp fall to an estimated 0.7% in 2009 we expect inflation (EU harmonised measure) to edge up. However, it will remain low compared with recent years at 1% in 2010 and 1.6% in 2011.

On October 7th the Italian Constitutional Court deemed unconstitutional a law passed by parliament in July 2008 giving immunity from persecution to the prime minister, Silvio Berlusconi.
The Court ruling has paved the way for two trials involving the prime minister to be reopened. The more serious of the two has to start from scratch, so is unlikely to be completed before it is stopped by the statute of limitations.
In early October several thousand people protested against what they saw as a threat to the freedom of press from Mr Berlusconi and his government.
On September 26th the cabinet approved the draft 2010 budget, which the minister for the economy, Giulio Tremonti, called "light" because it contains no new taxes and no new spending cuts.
On October 7th the European Commission initiated excessive-deficit procedures (EDP) against Italy and eight other EU countries. Nine others came under the procedure earlier in the year.
GDP contracted on a quarter-on-quarter basis by 0.5% in the second quarter of 2009 compared with a fall of 2.7% in the first quarter.
After falling by 0.9% year on year in the first quarter, employment fell by 1.6%, or 379,000, in the second quarter.

Source: Country Report