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 Topic: European Macroeconomics & Governance

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)


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)


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

Blog Post

Do wide-reaching reform programmes foster growth?

With growth gathering momentum in the eurozone, some have claimed this is the proof that structural reforms implemented during the crisis are working, re-opening the long-standing debate on the extent to which reforms contribute to fostering long-term growth. This column employs a novel empirical approach – a modified version of the Synthetic Control Method – to estimate the impact of large reform waves implemented in the past 40 years worldwide.

By: Alessio Terzi and Pasquale Marco Marrazzo Topic: European Macroeconomics & Governance Date: March 28, 2018
Read article More on this topic More by this author


Greece must capitalise on its growth momentum

Better-than-expected growth performance reflects the underlying positive changes in the Greek economy – but net investment is in fact negative, while Greece has various institutional weaknesses. Further improvements must be made regarding Greece’s attractiveness to foreign direct investment. A new (at least precautionary) financial assistance programme would improve trust in continued reforms and also address eventual public debt financing difficulties.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: March 26, 2018
Read article More on this topic More by this author


Europe needs a strong Italy

Europe needs to have its Italian voice. A stable government is required not only to pursue domestic policies and remain fiscally prudent but also to negotiate on euro-area reform, priorities in the EU budget and intensifying competition in global trade.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: March 20, 2018
Read article More on this topic More by this author

Blog Post

Clouds are forming over Italy’s elections

While the prospect of a gridlock reassured investors about the short-term risk of an anti-establishment government, Italy still needs a profound economic shake-up and is in no position to afford months or years of dormant governments.

By: Alessio Terzi Topic: European Macroeconomics & Governance Date: February 28, 2018
Read article More on this topic More by this author

Blog Post

The Italian elections

Italy goes to the polls on March 4, with a new electoral law that is largely viewed as unable to deliver a stable government. We review recent opinions and expectations,  as well as economists’ assessment of the cost/coverage of parties’ economic promises. 

By: Silvia Merler Topic: European Macroeconomics & Governance Date: February 26, 2018
Read article More on this topic More by this author


Beyond border control, migrant integration policies must be revived

Border control and burden-sharing of refugees is just one aspect of immigration policies. Greater financial inclusion and the tailoring of regulations to refugees' specific needs would benefit not only the refugees themselves, but also native citizens.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: February 23, 2018
Read article More on this topic More by this author

Blog Post

The financial side of the productivity slowdown

Scholars have devoted much research to the “productivity puzzle” that has emerged after the crisis, and some are investigating the role of financial frictions and capital allocation in relation to this phenomenon.

By: Silvia Merler Topic: Global Economics & Governance Date: January 22, 2018
Read article


Chinese banks’ improved asset quality cannot hide other phantoms

The recent improvement in asset quality cannot mask other growing concerns in China’s banking sector. Beyond liquidity concerns, other structural issues such as low profitability and insufficient generation of organic capital, are emerging.

By: Alicia García-Herrero and Gary Ng Topic: Finance & Financial Regulation, Global Economics & Governance Date: December 20, 2017
Read article More on this topic More by this author

Blog Post

Moroccan job market issues, and labour trends in the Middle East and North Africa

Morocco is an interesting case of structural labour market disequilibrium despite respectable growth, and illustrates the issues facing the region’s oil-importer countries

By: Uri Dadush Topic: Global Economics & Governance Date: December 7, 2017
Read about event

Past Event

Past Event

Sustainable growth in transition countries

This event will feature a presentation of the EBRD Transition Report 2017-18.

Speakers: Jonathan Charles, Zsolt Darvas, Sergei Guriev, Debora Revoltella and Lucio Vinhas de Souza Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: November 28, 2017
Read article Download PDF

Policy Contribution

European Parliament

How should the European Central Bank ‘normalise’ its monetary policy?

During the crisis, the ECB resorted to a number of unconventional monetary tools. This paper discusses how to phase out these policies and what the ‘new normal’ in monetary policy should look like.

By: Grégory Claeys and Maria Demertzis Topic: European Macroeconomics & Governance, European Parliament, Testimonies Date: November 23, 2017
Read about event More on this topic

Past Event

Past Event

Growth, productivity and social progress in Europe

On 26 October, Bruegel is organizing an interactive brainstorming seminar on Growth, Productivity and Social Progress in Europe. This is a closed-door, high-level workshop for a selected number of experts in the field.

Speakers: André Sapir Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: October 26, 2017
Load more posts