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 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)

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

Podcast

Podcast

Italy's economic and political outlook

In this week's Sound of Economics, Bruegel affiliate fellow, Silvia Merler, is joined by Marcello Minenna, PhD lecturer at the London Graduate School and Head of Quants at Consob, as well as Lorenzo Codogno, LSE visiting professor, to discuss the Italian government's economic outlook in the European context.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: July 11, 2018
Read about event More on this topic

Past Event

Past Event

Understanding Italy: challenges and perspectives in the European context

This is an invitation-only workshop to discuss Italy’s economic and political challenges and what lies ahead

Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 11, 2018
Read article More on this topic

Opinion

Making Italy grow again

On March 4th, Italians sent a resounding message in favour of a break with the past. The ultimate test for the new ‘government of change’ will be whether it succeeds where all others have failed over the past two decades: bringing the country back to growth. The authors propose three different actions to revamp Italy’s ailing productivity and gear the country’s productive capacity towards the 21st century: human capital, e-government, and green growth.

By: Simone Tagliapietra, Alessio Terzi and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: June 26, 2018
Read article More on this topic More by this author

Blog Post

Demographics and Long Run Growth

Scholars have been investigating the relationship between demographics and long term growth, in the context of the secular stagnation hypothesis. We review recent contributions.

By: Silvia Merler Topic: Global Economics & Governance Date: June 18, 2018
Read article More on this topic More by this author

Opinion

« Mieux vaudrait laisser les gouvernements libres de tenter les politiques de leur choix »

Les peuples ont le droit de faire des erreurs: Selon l’économiste Jean Pisani-Ferry, l’Union européenne doit accepter les aspirations légitimes à des politiques disparates, tout se prémunissant contre la contagion de leur corollaire : la possibilité d’une faillite souveraine.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: June 12, 2018
Read article More on this topic More by this author

Blog Post

The Italian mini-BOT debate

Talks of parallel currency are not new in Italy. But one of the proposals – the so called mini-BOT – has made it into the government contract that underpins the current League-M5S coalition. We review what has been said about these proposals.

By: Silvia Merler Topic: Finance & Financial Regulation Date: June 11, 2018
Read article More on this topic

Blog Post

Is the ECB collateral framework compromising the safe-asset status of euro-area sovereign bonds?

Central banks’ collateral frameworks play an important role in defining what is considered as a safe asset. However, the ECB’s framework is unsatisfactory because it is overly reliant on pro-cyclical ratings from credit rating agencies, and because the differences in haircuts between the different ECB credit quality steps are not sufficiently gradual. In this note, the authors propose how the ECB could solve these problems and improve its collateral framework to protect its balance sheet without putting at risk the safe status of sovereign bonds of the euro area.

By: Grégory Claeys and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: June 8, 2018
Read article More on this topic

Blog Post

Mini-BOT in the government programme of the Five Star Movement and the League

The economic evaluation of mini-BOT very much depends on its specific characteristics. Overall it appears to be a blend of an inferior security and inferior money. More important than its specific characteristics is the message that the implementation of the mini-BOT would send about Ital-exit: inevitably, given what the League and its representatives have said and written, the mini-BOT would be seen as a first step in the exit of Italy from the euro, rekindling denomination risk attached to Italian securities.

By: Francesco Papadia and Alexander Roth Topic: Finance & Financial Regulation Date: June 5, 2018
Read article More on this topic More by this author

Blog Post

The Italian Crisis

While Italy has been through one of the gravest institutional crises in its history, we review recent opinions on the topic.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: June 4, 2018
Read article More on this topic More by this author

Opinion

Mattarella’s line in the sand

The vital task confronting Europe is to reconcile citizens’ right to make radical choices with the need to ensure that decisions leading to constitutional change are subject to sufficient public deliberation. The EU and the euro must not be constitutional cages; but nor should they be subject to ill-considered decisions.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: June 1, 2018
Read article More on this topic

Opinion

How worried should we be about an Italian debt crisis?

Political backlash to slow growth and immigration has produced the least cooperative government imaginable in Italy, a coalition between the left-populist Five Star Movement (M5S) and the right-populist Lega. And borrowing costs have started to rise in reaction. Does this mean that a crisis is imminent? If so, how bad would it be?

By: Silvia Merler, Olivier Blanchard and Jeromin Zettelmeyer Topic: Finance & Financial Regulation Date: May 28, 2018
Read article More on this topic More by this author

Podcast

Podcast

Director’s Cut: What risk does Italy’s new government pose to the euro area?

In this Director’s Cut of ‘The Sound of Economics’ podcast, Guntram Wolff discusses with Bruegel senior fellow Francesco Papadia the potential consequences of Italy’s new coalition government – both for Italy itself, and for the euro area as a whole.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: May 25, 2018
Load more posts