According to Italy Review (2007), since the end of World War II, the Italian economy has been transformed from an agrarian to an industrial base and now ranks as the seventh largest economy in the world with an economic structure comparable to that of other advanced Organization for Economic and Cooperative Development (OECD) countries. However, Business Monitor International (2008) states that the Italian economy will ease in 2008 due to record energy prices, a strong Euro, and the potential fallout from an autumn 2007 global credit squeeze. Also, the downturn in economic activity is likely to be a longer term winding down of the growth cycle toward historical trends due to domestic fiscal and monetary policies. A major step forward for Italy, which has experienced 59 governments since World War II is a strong push to stabilize government spending and to tackle corruption and the patronage system (Country profile, 2008).
Bibbee (2007) described Italy's economic system as based on federalism and said that structural reforms and budget consolidation coupled with the empowerment of subnational governments regarding the uses of tax money have the potential to improve the allocation of public resources while promoting the advancement of lagging regions in the country. Monetary and fiscal policies in Italy reflect federalism. Fiscal policies are being decentralized via spending with improvements in regulatory and tax powers at the subnational and national levels. Constitutional reform in 2001, though not fully implemented, should ultimately lead to a stronger focus on the financing side or getting a better match between spending responsibilities and taxing powers to boost local autonomy and responsibility (Bibbee, 2007).
Fiscal policy mechanisms to achieve price stability have been and should continue to be implemented in Italy (Bassetto, 2006). Limited inflation and greater independence of the Bank of Italy have allowe...