The U.K. economy unexpectedly shrank by 0.4% in the third quarter this year, officially sending the region into its longest recession since record-keeping began more than 50 years ago.  (Why the United Kingdom is hurting).

Edmund Conway and Andrew Porter for Telegraph U.K. report that adding insult to injury is that the United Kingdom has fallen beneath Italy for the first time since the mid-1990s to become the world’s seventh-largest economy. (When will Italy rebound?)

Blame two things: the devaluation of the British pound and the severity of the recession overall. France surpassed the United Kingdom last year. (Tom talks Europe on CNBC).

Italy first surpassed Britain’s economy in 1987. The milestone is being hailed as  confirmation that Italy has proved its resilience.

For more stories about Italy or United Kingdom, visit the corresponding categories.

• iShares MSCI Italy Index (NYSEArca: EWI): up 30% year-to-date

• iShares MSCI United Kingdom (NYSEArca: EWU): up 33.5% year-to-date

Global economies are already hinting at signs of recovery, and this will ultimately translate into better company profits and better share prices, comments Bruce Cameron for Personal Finance.

Cameron suggests looking to investments abroad because the potentially higher inflation rates in the United States as compared to other countries will cause the dollar to further depreciate. Thus, overseas investments would further benefit from the strength of foreign currencies.

Through the use of ETFs, investors are able to track indexes composed of various securities or commodities. ETFs are seen as a low-cost means of investing in foreign markets that would otherwise be inaccessible to the average investor. It is also prudent to diversify foreign holdings to reduce risk in one’s portfolio.

When it comes to gaining exposure in overseas markets, there are ETFs that range from very broad (Vanguard FTSE All-World ex-US (NYSEArca: VEU) to more specific (iShares MSCI Italy (NYSEArca: EWI).

Potential overseas investors should note that emerging markets are considered riskier than those of developed countries. Follow the trend lines, and you would not be amiss to have an exit strategy in place. For more information on trends, visit our trend following category.

• iShares MSCI Emerging Markets (NYSEArca: EEM): up 60.8% year-to-date

• SPDR DJ Euro STOXX 50 (NYSEArca: FEZ): up 25.6% year-to-date

Max Chen contributed to this article.

Bank of Italy Governor Mario Draghi says Italy’s economy will take a minimum of four years to rebound to 2007 levels, and public debt and deficits will continue to skyrocket in the meantime, writes Christopher Emsden for The Wall Street Journal. The government could begin to run a primary deficit (budget spending before interest payments on public debt) for the first time in 18 years.

One key point Draghi insists on is a crackdown on tax evasion. Istat, the Italian government statistics agency, calculates that 16% of Italian GDP is in the untaxed informal sector.

In an attempt to safeguard businesses, Draghi urged the government to lower tax rates on workers and businesses, reports Paolo Biondi for Reuters. But this suggestion may fall on deaf ears as Italy labors under the highest debt in the euro zone and third highest in the world.

The Italian research institute Isae calculates Italy’s economy will shrink by 5.3% this year, twice previous forecasts, reports Steve Scherer for Bloomberg. Italy, Europe’s 4th largest economy, could see a 0.2% growth next year.

• iShares MSCI Italy Index (EWI): up 7.3% year-to-date

For more information on Italy, visit our Italy category.

Max Chen contributed to this article.

Partial results show Prime Minister Silvio Berlusconi’s Freedom People Party received around 35%, down from projected 45%, of the vote in elections for the European parliament, reports Luca Casiraghi for The Wall Street Journal. Ultimately, 35% was enough and Berlusconi prevailed, but it’s a sharp decline in support.

As the economy is estimated to contract 5% this year, citizens feel that Berlusconi, a rich businessman, is out of touch with the problems of the Average Joe. Unemployment is a sensitive issue, and the Northern League, an anti-immigration and pro-federal political body, gained at opposition’s expense.

Berlusconi thinks the country’s economic downturn is waning, noting improvements in some sectors, according to ChinaView.

However, the national retailers’ association Confcommercio says that signs of an economic recovery are still too weak to be substantial. A report showed that household spending trends in April was marked by uncertainty. Consumer spending rose in March but dropped 0.4% in April.

• iShares MSCI Italy Index (EWI): down 1.2% year-to-date

For more information on Italy, visit our Italy category.

Max Chen contributed to this article.

Meanwhile, the style factor is not compromised in Italian design, as designers are set to weather the recession with clean, timeless design that can stay the decade. Sensible and sustainable were the mantras for the 2,700 manufacturers that launched collections to more than 300,000 showgoers at the Milan Fairgrounds and at independent exhibitions all over the city, reports David A. Keeps for The LA Times.

Italian carmaker Fiat is set to grow, as they take  a stake in Chrysler LLC. Fiat may spin  off its automobile division following a purchase of General Motors Corp.’s European unit, sending the Italian carmaker’s shares to a seven-month high in Milan. Fiat already plans to take control of Chrysler, based in Auburn Hills, Michigan, in a deal announced by President Barack Obama last week, reports David Risser and Steve Rothwell for Bloomberg.

• iShares MSCI Italy Index (EWI): down 4% year-to-date

France, Germany and Italy are the top three economies within the euro zone and second quarter outlook are bleak as sentiment is low. The reports, all released Thursday, combined with a report a day earlier that German corporate sentiment fell to a record low in March, says Paul Carrel for Reuters on International Herald Tribune.

Household borrowing has stopped and business lending has slowed down since earlier this year. Many are anticipating a rate cut sooner than the proposed 0.50% cut currently set for April.

The country’s business lobby Confindustria also came out with some bearish figures, saying that it expected GDP to fall 3.5% this year. It fell 3.3% in the first quarter, reports Jennifer Clark for The Wall Street Journal. That’s worse than the previous forecase from the government for a 2% contraction.

Overall, the picture is a weak economic environment and the government must step in soon. Although sentiment and business morale was reportedly low in Italy, Forbes rated Italy as #31 for the best countries to do business.

Reasons include the diversified industrial economy, manufacture of high-quality consumer goods produced by small- and medium-sized enterprises, and a sizable underground economy making up around 15% of GDP.

• iShares MSCI Italy Index (EWI): down 17.8% year-to-date; up 11% for one week

A Plan That Isn’t Working. The inhabitants of the 16-country euro currency zone have experienced living beyond their means and taking on massive debt through consumption, only to find themselves in the throes of abandoning the currency altogether or going bankrupt. Landon Thomas Jr. for The New York Times reports that the adoption of the euro about 10 years ago by countries such as Greece, Italy, France and Spain was meant to unify Europe economically and politically.

Adding to Debt. The new idea is that the glory of the euro has glossed over the serious economic problems that plague these countries, and possibly exacerbated them by increasing debt. The currency had once been a possible way to rival the United States, while the poorer countries were prided on their euro zone membership, as proof they had their finances and debt in order.

Smaller Countries Have to Fight. Some of the stronger countries such as France, Germany and the Scandinavian members have been able to shore up their economies and create billion-dollar stimulus plans while protecting their banks; the smaller countries, such as Greece, Ireland, Italy and Spain, have been left out in the cold, having to fend for themselves in the global uncertainty. It’s turned out that membership hasn’t been a cure-all of social and economic issues.

• iShares MSCI Spain Index (EWP): down 18.2% year-to-date

• iShares MSCI Italy Index (EWI): down 17% year-to-date

Italian business confidence fell from 71.6 in Nov. to 66.6, its lowest level since index began in 1991, as contagious pessimism rampages through company outlook for orders and production, reports Sofia Celeste for The Wall Street Journal.

The drop further indicates economists’ view that the Italian GDP may fall as low as 2.4% in 2009, which may be Italy’s worst recession experienced since World War II.

The strain of the international financial crisis has Italy’s companies continuing to cite difficulty in garnering bank loans as banks ignore the Italian government and central bank call for continued lending.

The Prime Minister, Silvio Berlusconi, is expected to change the GDP forecast from +0.5% to -1% for 2009.

Without bright prospects, Italy and its ETF, iShares MSCI Italy Index Fund (EWI), which ended 2008 down 46.8% year-to-date, may have to brace for a long recession.

The Italian state has been a major player in an economy that favors private connections. Italy, like most European countries, has been open to bailing out failing financial institutions. Italy’s prime minister, Silvio Berlusconi, also happens to be the most powerful and wealthiest businessmen in the private sector. He has the potential to take the spoils system to a new level.

Rachel Donadio for The New York Times says that as the markets fell and the panic set in this month, Berlusconi took a 40% hit within his own private shares. However, this hasn’t fazed him, as he is in a powerful and unparalled position within Italy’s economy and politics. He stands to control billions of dollars in public money to bail out private companies.

Some Italians feel that his power is dangerous, while others feel that it’s necessary in these times. Either way, many believe that he influences the economy. Italy bucks the trend of many other countries, where a leader’s popularity rises and falls in tandem with the economy.

While the Milan stock market has dropped 22% since Sept. 1 and economic anxieties are heightened, Berlusconi’s approval ratings are at 62%.

iShares MSCI Italy (EWI) could soon feel the effects of Berlusconi’s wide influence in one way or another. The fund is down 52.6% year-to-date.

During the second quarter, the Italian economy shrank, taking the country closer to a recession than it has been in more than a decade as households and businesses cope with high energy prices.

The economy contracted 0.3% after expanding 0.5% from January to March, says the Rome-based statistic department. Flavia Krause-Jackson for Bloomberg also reports that from the same period one year earlier, there was no growth at all, and economists surveyed are expecting stagnation.

iShares MSCI Italy Index (EWI) and the NETS S&P/MIB Index Fund (ITL) may reflect a slumping consumer confidence and stalled manufacturing. The bottom line is that the price of crude is 65% more expensive than it was a year earlier, and it’s hurting.

To help trigger growth, Prime Minster Silvio Berlusconi has gone against the people and reduced the state bureaucracy while raising the average pension age to 58. Meanwhile, consumers have cut back by not spending on new cars and new clothes.

EWI is down 21.1% year-to-date, while ITL launched on May 7.