Italian Stocks Finally Look Fashionable

By , Special to the Christian Science Monitor

Well-dressed Italian shoppers crowd into stores along the Via Veneto, buying off-the-rack suits and dresses costing thousands of dollars.

Even in Rome's working-class districts, Italians emerge from department stores with shopping bags full.

Italy is enjoying an economic success few had expected five years ago, when the lira tumbled and the country seemed in perpetual political crisis.

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But the economy has bounced, with the main stock index, the Mibtel 30, up 59 percent last year and analysts predicting continued strength ahead.

"Inflation is down, and economic growth is good," says Lawrence Kay, director of investor relations at Instituto Mobiliare Italiano, an Italian merchant bank in Rome. "The Italian market is poised for major increases over the next two years."

Long considered one of the weak countries of Europe, Italy has surprised even itself. Inflation has dropped to 1.6 percent. The budget deficit fell to 3 percent of the economy last year, down from 12 percent in 1992.

The left moves right

Economists credit the center-left government of Prime Minister Romano Prodi, elected in 1996. The ruling coalition, including former Communists, continues to privatize state enterprises and pare back social welfare.

Economist Paolo Leon embodies many of the surprising changes. To make ends meet, he works as a professor at the University of Rome and moonlights on two other jobs. Yet he holds an interview not in a musty academic office, but in a research center filled with pastel-colored desks and shiny metal chairs.

A "card-carrying member" of a left-wing party, Mr. Leon says many Italians who now embrace change would have feared losing their jobs in the past.

He says the economy "will benefit overall because of increased trade and lower interest rates."

And spurred by falling interest rates, many Italians are pouring money into stocks, shifting away from bonds.

Risks on the road

Some potential potholes remain:

* The Milan stock exchange trades only 201 stocks, and the market tends to mirror developments in New York and London markets.

* Italy no longer benefits from a favorable exchange rate; exports could slow.

* If German interest rates rise, Italy's follow. "They're the dog, we're the tail," Mr. Kay says. A hike could derail growth.

* Italy's 12 percent unemployment could persist or even rise, putting pressure on social spending and raising government deficits.

* A political crisis could shake the market. Last fall, the Milan exchange plunged 6.2 percent in one day when the far-left wing of the coalition almost toppled the government with a demand for slower cuts in social programs.

Still, economist Leon remains optimistic. He says small companies and the service sector remain dynamic. "The long term prospects remain good."

With apologies, he cuts the interview short. The well-dressed former Communist has some shopping to do.

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