Macroeconomics in Ital, Research Paper Example

Economic Institutions’ Recent Activities

The Financial Market

The main stock exchange market of Italy is Borsa Italiana that has been operated under public ownership until 1998 since its inception in 1808, privatized in 1997 and became the part of the London Stock Exchange in the year 2007. The FTSEMIB in Italy is considered a main index of stock market that helps in tracking the large companies’ performance. It is declined 25.38% or 190 points in the month of February 2012. In the last year, the FTSEMIB declined 25.38% or 5605 points, in April 2011 reached to a high level of 22417.96 points and in the month of September of 2011 reached to a low level of 13474.14 points. In the past, the market value of FTSEMIB from 2003 until 2012 averaged 28249.39 points that reached in the month of May 2011 to a high level of 44364.00 points and in March 2009 appeared as a record low level of 12621.00 points. Because of these fluctuations in the stock market the Gross Domestic Product (GDP) in the 4^th quarter of 2011 decreased by 0.5%, when compared to the previous year’s 4^th quarter (Roselli, 2012, page. 89). Historically, it has been noted that from the year 1982 to 2011, average annual growth rate of GDP in Italy was 1.44% that reached in December 1988 to high level of 4.70% and in March 2009 reached to a marked low level of -6.70%. (Roselli, 2012, page.90) (http://www.tradingeconomics.com/italy/stock-market)

(GDP Annual Growth Rate accessed from http://www.tradingeconomics.com/italy/stock-market)

The Banking System and Monetary Policy

The central bank, the Bank of Italy, stabilizes the money supply and supervises banking and credit institutions. At present the Italy’s banking system is experiencing a reform period. The sectors comprise on 792 banks, from these 30% or 243 are joint stock companies (SpA) and represent 80% of the local market of banks. The banking industry also features two sorts of entities working under a structure of cooperative nature, 38 cooperative banks and 444 are small mutual banks (Figures as at March 2004).

(Bank of Italy, Statistical Bulletin; Banca Intesa calculations, 2004)

Generally, 70% of banking activity is carried out by approximately 50 banks of medium/large size, whereas 30% banks are handled by approximately 740 banks of small and minor size. The banking sector of Italy is now completely private. Another strange characteristic of banking sector in Italy is the system of corporate governance in cooperative banks that are by nature of their cooperative environment. Environment environment. Banca d’italia is the central bank of Italy which held responsible to set or change the monetary policy stance (MPS) of a country. Italy is one of those countries that affected heavily due to the current economic crisis. Mentioned below graph tells the interest rate history of the country.

(Euro Area Interest rate accessed from http://www.tradingeconomics.com/italy/interest-rate)

The prevailing interest rate set by the central bank in the fiscal year 2002 to 2003 was 3.3%. The year 2005, 2006 and 2007 were the years of economic prosperity for the country in which the country expanded its interest rate by a substantial percentage. In the mid 2007, the prevailing interest rate of Italy was around 4% which was quite high as compared to other European countries. Banca d’italia has to decrease down the level of interest rate from the fiscal year 2009 to 2010 merely because of the current financial crisis. In order to appreciate the level of borrowings, the central bank of the country decreased down the interest rate up to 1% (Italian monetary policy stance, 2010). The prevailing interest rate of Italy is 1.25% which is quite reasonable from the standpoint of a European country. The country will stabilize the same interest rate for the future of their economy.

The Government and Fiscal Policy

Italian economy which is one of the largest economies of the world had a perfect and citizen’s friendly fiscal policy before the current economic crisis. The tax rate on average income was 2.5 to 4% which was quite nominal and affordable from the viewpoint of a common man who has nominal income. In return, the government provides all sorts of benefits to the individual and to the corporations as well (Buti, 2010, page.154). After the current economic downturn, the government of Italy became extremely serious and cautious to broaden the tax base of the country. Increasing the taxes on individuals, the government also increased the tax of corporation by 5% from 30% to 35% merely to support the country (Giovane and Sabbatini, 2010, page.71). The below mentioned table revealed the future consequences of the tax increment on the country.

(Effects of Increasing tax rate on the budget deficit of Italy, http://www.articlesrange.com/article.php?id=426)

From the above table it can be said that the deficit of the country will decrease each year by a reasonable percentage due to the high taxes.

References

Evans, Adele. (2011). Italy. New York: DK Publishers.

Buti, Marco. (2010). Italy in EMU: The Challenges of Adjustment and Growth. New York: Palgrave Macmillan, page. 154.

Giovane, Paolo, and Sabbatini, Roberto. (2010). The Euro, Inflation and Consumers’ Perceptions: Lessons from Italy. London: Springer, page, 71-73.

Roselli, Alessandro. (2012). Financial Structures and Regulation: A Comparison of Crises in the UK, USA and Italy. New York: Palgrave Macmillan, page. 89-90.

Italian monetary policy stance, (2010), retrieved from http://www.tradingeconomics.com/italy/central-bank, Accessed on [2012-Mar-10]

GDP Annual Growth Rate accessed from http://www.tradingeconomics.com/italy/stock-market, Accessed on [2012-Mar-10]

Bank of Italy, Statistical Bulletin; Banca Intesa calculations, 2004 [2012-Mar-10]

Smith, Richard. (2011). “Effects of Increasing tax rate on the budget deficit of Italy.” Retrieved from http://www.articlesrange.com/article.php?id=426, Accessed on [2012-Mar-10].