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Italy’s economic slowdown

Italy’s economy, already the most sluggish in Europe, slowed down further, fuelling fears for the future of Romano Prodi’s centre left-coalition government. According to data released recently by the country’s National Institute for Statistics, gross domestic product rose by merely 0.1 per cent in the April-June quarter — an 18-month low. The announcement of the slowdown came just as Prime Minister Romano Prodi was preparing to celebrate a year in o ffice at the head of a notably fractious coalition. There are fears that the troubles of Europe’s fourth largest economy, valued at $1.8 trillion, could affect the fortunes of its main trading partners within the European Union. Analysts point out that Italy has lagged behind its euro region partners for the last 11 years. If the trend continues, Mr. Prodi, who has made economic rigour and debt reduction a central plank of his policy, could encounter serious difficulties. Italy’s national debt stands at 107 per cent of GDP. Several factors have contributed to the poor economic performance, among them rising interest rates and fuel prices and the relentless strengthening of the euro against the dollar and the yen. Since mid-January 2007, oil prices have gone up by 41 per cent. The euro rose 17 per cent to reach $1.38 even as the European Central Bank, which has doubled its benchmark rate since the end of 2005 to a six-year high of 4 per cent, warned of yet another increase in September. The strong euro has hit exports and slowed down industrial output. Further, the fallout from the sub-prime mortgage crisis in the United States is stoking fears among investors and economists that growth will slow down in the second half of the year.

Because it has failed to institute necessary reforms, Italy has fared poorly compared with Germany and the Benelux states, which face the same hurdles to growth and exports. Italian industry faces burgeoning labour and production costs. Its lack of specialisation in high-end niche markets leaves it vulnerable to international competition, particularly from Asian countries. With disunity rife among Ministers — Mr. Prodi’s wafer-thin majority in the Senate makes him hostage to the demands of warring political parties — political problems are perceived to have contributed to the erosion of consumer confidence. The Prime Minister’s ratings have suffered a worrying fall in recent opinion polls, with only 42 per cent of the population supporting his policies. It will be a pity if Mr. Prodi’s government goes down without getting a fair opportunity to repair the deep damage done to the economy, social fabric, and polity by the unsavoury policies of the Berlusconi era.

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