With all the fuss about Greece's debt talks (International Monetary Fund head Christine Lagarde, pictured, has insisted on debt relief) and Spain's elections (again), one eurozone country that people seem to have forgotten about is Italy.
That's a shame, because there are clear signs that things are getting better. It could even emerge as the single currency area's big reformer in half a year or so.
Prime Minister Matteo Renzi has tied his political future to the outcome of a referendum on constitutional reform that is due to take place in October. It sounds boring compared with the dramatic "Brexit" referendum in the U.K., but if he wins, the outcome could actually change the country's economy for the better.
The referendum will ask the Italian people to approve measures already passed by parliament to cut the powers of the upper house of Parliament, the Senate. This would result in faster adoption of legislation, which would mean swifter implementation of reforms needed to push the economy forward.
Renzi's critics say this is a blow to democracy, but analysts have pointed out that legislative bills keep being pushed back and forth between the two chambers of Parliament, which results in a notoriously slow legislative process.
The IMF has praised the reforms that Italy has carried out so far, and pushed for more.
In its annual assessment of the country, the IMF noted that reforms to unify Italy's dual labor market (where permanent employees enjoy a lot of benefits and almost life tenure in jobs while new ones, mostly the young, jump from one insecure contract into another) have already somewhat stabilized the labor market, although unemployment remains high at more than 11%.
"The list of reform initiatives has been impressive," the IMF's assessment said. Besides labor reform, it cited legislation to revamp the cooperative and mutual banks that will help the consolidation of the sector, a revision of the insolvency system to speed up collection of collateral, as well as reform of the state budget, which is under way.
These reforms must be followed by others, and it will take some time for their effects to become obvious. "While current measures could gradually improve the legal environment for credit, their full impact is likely to be realized only over the medium term," the IMF said.
Italy also benefits from a tailwind coming from the European Union, which this year has been unusually lenient when it comes to budget deficit transgressions by member states.
Renzi had asked Brussels to approve an additional 0.9% of gross domestic product leeway in fiscal relaxation for this year, in order to help Italy's economy grow.
Last week, the European Commission approved a 0.85% of GDP additional fiscal room, or about 14 billion euros ($15.6 billion), to help the country cope with the refugees influx and invest in infrastructure. It basically granted Renzi's wish.
Add to this the fact that Italian banks and companies have benefited from the record low interest rates brought about by the European Central Bank (ECB)'s unprecedented asset purchases, and it becomes clear the country is in a sweet spot.
Investors keen to get some exposure to Italy ahead of its October referendum could do so via the iShares MSCI Italy Capped ETF (EWI). They need nerves of steel though, as its performance year to date has been a negative 7.5%. This ETF allocates more than a third of its weight to financial services and markets are jittery about Italian banks.
Italy's economy relies heavily on small and medium-sized companies, which are set to benefit from more relaxed fiscal rules and labor market reforms. There is no vehicle for U.S. investors to get exposure strictly to Italian small- and mid-caps, but a good proxy could be the WisdomTree Europe Hedged SmallCap Eq ETF (EUSC). Around 20% of its assets are made up of Italian firms.
Another ETF that U.S. investors could use is the First Trust Eurozone AlphaDEX ETF (FEUZ), but this one is heavily dominated by German and French companies. Italy is its fifth-largest holding, making up 7.26% of the ETF, behind the Netherlands and Finland but ahead of Spain.
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