Opinion

Could Europe’s next growth locomotive be Made in Italy?

Important reforms put in place over the past months, combined with a conjunction of particularly supportive external factors, mean that Italy could indeed become the fastest growing large economy in the euro area in a not-too-distant future.

By: Date: October 27, 2015 European Macroeconomics & Governance Tags & Topics

Linkiesta-300x70This op-ed was originally published in Linkiesta

“I bet you that in the next 10 years, Italy will return to be the [economic] leader of Europe, the locomotive of Europe.” When reading these words on TIME magazine in late April 2014, many must have thought that Italy’s then new Prime Minister Matteo Renzi was at best youthfully delusional, at worst a dazzling propagandist.

Scepticism was all but unwarranted for a country that, over the past decades, had proved serially impossible to reform and, as a consequence, is the only EU member state, together with Greece, where real GDP is now below its 2000 level.

However, one and a half years down the road, the Prime Minister’s optimistic view for Italy starts no longer looking like a completely far-fetched scenario, but rather as a possibility. Important reforms put in place over the past months, combined with a conjunction of particularly supportive external factors, mean that Italy could indeed become the fastest growing large economy in the euro area in a not-too-distant future.

Figure 1. Real GDP (2000=100)

AterzI_27_10_15_1

Source: Eurostat

Notwithstanding a wafer-thin majority in Parliament, Renzi has managed to secure approval for reforms that have the potential to restructure deeply the Italian economy.

A substantial liberalisation of the labour market – embodied in the so-called ‘Jobs Act’ – could boost Italy’s appallingly low employment rate by as much as 10 percentage points over the long term according to a survey of business leaders attending the Forum Ambrosetti, and reverse the decline in labour productivity observed during the 2000s.

Figure 2. Employment rate (15 to 64 years)

AterzI_27_10_15_2

Source: Eurostat

With a final vote in the Senate in early August, foundations have been laid for a deep reorganisation of the public administration. Designed to simplify the byzantine bureaucratic apparatus that has long choked the Italian economy, the PA reform is also set to promote transparency and clearer lines of accountability. Past success stories show how these are precisely the set of principles behind an effective anti-corruption strategy, in a country where the problem has become disconcertingly rampant.

The latest major addition to Renzi’s reform checklist is an agreement on overhauling the Italian institutional set-up that, in the Prime Minister’s plans, will transform the Senate in a regional chamber with little say on national legislative matters. Combined with the electoral reform – the so called Italicum – approved in May, the constitutional reform has the potential to ensure political stability to a country where the average lifetime of a government in the post-War era has been 12 months.

Tables have turned in favour of Renzi’s prophecy also due to a set of particularly favourable external conditions. The ECB’s QE programme has proved more successful in Italy than elsewhere in rekindling bank-lending channels, while a combination of low oil prices and a weak euro have bolstered the country’s domestic and foreign demand. Finally, the compression of sovereign bond yields resulting from the ECB’s actions have granted Italy more fiscal leeway: a lever that the Renzi government seems set to use to the fullest extent.

All the above suggests that indeed Italy could potentially become the fastest growing large economy in the euro area over the next few years. However, this scenario has merely moved from wishful thinking to an eventuality, still hardly representing the baseline.

While the reforms put in place so far represent important milestones that could help transform the recovery from cyclical to structural, their success will rest on effective implementation. The overarching framework of the PA reform was indeed approved by Parliament, but will require as many as 20 executive decrees in order to be completed. As usual, the devil will be in the details. Similarly, agreement was reached on the text of the constitutional reform, but this will still require a final vetting in Parliament and, most likely, official sanctioning by a referendum in late 2016.

More in general, Italy’s reform agenda is far from completed, with important measures still needed to shorten the length of judicial procedures, simplify the current labyrinthine tax system, bring wage bargaining closer to plant level, and restructure the banking sector, only to mention a few priorities.

Moreover, Italy’s longstanding vulnerabilities such as its mammoth public debt – second only to Greece’s in GDP terms – and high dependency on energy imports imply that a macroeconomic shock, be it in the form of renewed financial market jitters or higher oil prices, could easily derail the recovery.

The challenges facing Italy are formidable, but an equally formidable and far-reaching reform plan can succeed in finally bringing the country back to sustained growth after decades of stagnation. As the recovery gains traction and reforms start bearing fruit over the coming months, no resting on laurels will be allowed if Renzi intends to win his bet.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to communication@bruegel.org.

View comments
Read article More on this topic More by this author

Blog Post

Silvia Merler

Financial implications of the Italian referendum

On Sunday, Italy will held a constitutional referendum whose implications for the political stability of the country are uncertain. Right after the referendum, Italy’s oldest and most troubled bank - Monte dei Paschi di Siena - is expected to complete a very important and sizable capital raise. Here we look at the situation and implications of this critical juncture.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: December 2, 2016
Read article

Blog Post

Giuseppe Porcaro
hsbeziyq

Tweeting the Italian referendum: the hashtag war

We are monitoring an aggregate of twitter hashtags in the run up to the Italian Constitutional referendum of 4 December 2016.

By: Giuseppe Porcaro, Henrik Müller and Gerret von Nordheim Topic: European Macroeconomics & Governance Date: November 29, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

The Italian referendum

What’s at stake: on 4 December, Italy will hold a referendum on a proposed constitutional reform approved by Parliament in April. The reform, which was designed in tandem with a new electoral law, aims to overcome Italy’s “perfect bicameralism” by changing the structure and role of the Italian Senate. It also changes the distribution of competences between the state and regions. After the shocks of Brexit and the US election, polls are now drifting towards a defeat of the government’s position in Italy.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: November 28, 2016
Read article More by this author

Opinion

Alicia García-Herrero

South Korea and Indonesia: a capital match

Mutually beneficial Jakarta-Seoul relationship could develop further with an upgrade in Jakarta’s sovereign debt.

By: Alicia García-Herrero Topic: Finance & Financial Regulation, Global Economics & Governance Date: November 23, 2016
Read article More on this topic More by this author

Blog Post

IMG_1985

Renzi is going all in on the Constitutional referendum: what are the (updated) odds?

Italians are being called to the ballot boxes on 4 December to either confirm or reject Constitutional amendments put forward by the government. Alessio Terzi constructed a probabilistic model based on poll data to assess the likelihood of such an event.

By: Alessio Terzi Topic: European Macroeconomics & Governance Date: November 17, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

Income convergence during the crisis: did EU funds provide a buffer?

Did EU funds play an important role in limiting the hit of the crisis on regional income?

By: Silvia Merler Topic: European Macroeconomics & Governance Date: November 10, 2016
Read article More on this topic More by this author

Opinion

Silvia Merler

An Italian take on banking crisis

The year 2016 has not been good to Italian banks. While resilient to the first wave of financial crisis in 2008, due to their low exposure to US sub-prime products and to the fact that Italy did not have a pre-crisis housing bubble, they have been suffering much from the euro sovereign crisis and the ensuing deteriorating economic conditions.

By: Silvia Merler Topic: Finance & Financial Regulation Date: October 27, 2016
Read article Download PDF More on this topic More by this author

Working Paper

wp-06-16_page_01

Income convergence during the crisis: did EU funds provide a buffer?

This paper shows that economic convergence continued during the crisis for the EU as a whole, although at a slower pace, but for regions in the EU14, and especially in the euro area, convergence appears to have stopped during the crisis, or even switched to a divergence path.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: October 18, 2016
Read about event More on this topic

Past Event

Past Event

Europe Lab: Competitiveness and inclusive growth

The Europe Lab aims to support the design, launch and implementation of actionable agendas for public-private collaborations to increase competitiveness and inclusive growth in Europe.

Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: October 12, 2016
Read about event More on this topic

Past Event

Past Event

Potential impediments to long-term investment

How can we encourage long-term investment in Europe? Many factors hinder long-term investment but are there risks involved in reviewing existing regulation?

Speakers: Sophie Barbier, Grégory Claeys, Miguel Gil Tertre, Edoardo Reviglio and Sandra Rigot Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: October 4, 2016
Read about event More on this topic

Past Event

Past Event

Inclusive growth in the European Union

Why is inclusive growth important and how do the EU’s social problems differ from social problems in other parts of the world?

Speakers: Brando Benifei, Monica Brezzi, Bea Cantillon, Zsolt Darvas, Jana Hainsworth, Stefaan Hermans, Barbara Kauffmann, Dalia Marin, Tim Murphy, André Sapir, Reinhilde Veugelers, Luca Visentini and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 29, 2016
Read article Download PDF More on this topic More by this author

Policy Contribution

pc-16-16

An approach to identify the sources of low-carbon growth for Europe

In order to secure growth and jobs, Europe needs a new growth model built on developing emerging sectors with high value added. But in which sectors can Europe grow, and what economic policies would work?

By: Georg Zachmann Topic: Energy & Climate Date: September 27, 2016
Load more posts