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Network News • 16-03-2023

Italy's economic struggle

Author: Lina Klesper - Legal Assistant PKF Malta
Published on Business Today: 16th March 2023

Giorgia Meloni, whose political party emerged victorious in recent elections, was sworn in as Italy's first far-right premier since the end of World War II. She is also the first woman to be premier.

Meloni, 45, recited the oath of office before President Sergio Mattarella, who formally asked her to form a government. Brothers of Italy party, which she co-founded in 2012, will rule in coalition with the right-wing League of Matteo Salvini and the conservative Forza Italia party.

Let us recall how Italy was the first country in Europe hit by the COVID-19 pandemic at the beginning of 2020, suffering a severe economic shock due to various protection measures that lead to a lockdown of Italy´s economic activity. As mid of 2022, the COVID-19 situation was manageable as in many other countries in Europe, economic activity took up, and remained at a resilient point although at lower levels when compared to previous years. In 2022 Italy´s economy recorded a growth of 3.16% after a drop of 9.03% as a result of the turmoil and hardships during the COVID-19 pandemic. To tackle the increasing healthcare costs that arose from dealing with the pandemic, the Italian government has issued a special BTP Futura scheme while waiting for regional support through the European Recovery Fund.

Let us pause and reflect on the bigger picture of Italy´s economic history.  This reveals a four decades-long struggle with low productivity, growth and internal governance, building a rather shaky foundation on which Italy has to rely on its way to recovery and beyond. It is true, that the days of Italy´s post-World War II economic miracle was characterized by extensive growth, especially seen in the agricultural sector.  Those years are gone. The miracle eventually came to an end in the 1990s with steadily decreasing productivity and negative growth after Italy joined the euro area. Since then, Italy had to deal with recessions, austerity measures, high sovereign debt, unemployment and basically non-existent growth. Hence, the question arises why Italy is always lacking in productivity and economic growth in the past forty years?

Ten years ago, a Guardian article listed “the six things wrong with Italy” including the stagnating economy, misogyny, ineffective justice system, organised crime and corruption, unstable politics with everchanging governments and finally the north-south divide. Specifically, concerning Italy´s business case, a paper by Bruno Pellegrino and Luigi Zingales of 2017 attempted to diagnose possible causes for the “Italian Disease”. They find that Italy´s lacklustre productivity since the 1990s is most likely caused by a technology gap with Italian firms not taking full advantage of the ICT revolution combined with a lack of meritocracy in the selection and rewarding of managers. Most interestingly, Italy´s case suggests that familism and cronyism can be serious impediments to economic development even for a highly industrialized nation.

Around 2014 when Italy was already in a six-year-long recession, Ashoka Mody, dedicated research to the question “Why does Italy not grow?” highlighting shortcomings in education, innovation and demographics. In comparison to Sweden representing an innovative country valuing entrepreneurship and business focus in universities and having a long-standing commitment to education eventually blessing the country with great innovative capacity and growth.  Under new premiership will Italy head for reform, by comparison Italy is faced with an innovation and education gap that could be said to be at the root of Italian economic ills. This shows in the relatively lower number of Italians pursuing tertiary education for example but also in the lacking quality of education available and ultimately in the lower quality of human capital. It is noticeable how governmental spending on education is low when compared to Sweden and France for instance. However, it seems to be a two-way street, that neither the Italians themselves nor the government is investing in education since the former can only expect low returns to their effort and the latter does not see the benefit in spending extra money on education. Thus, if returns to education are further weakened through a lower budget for education then future growth will predictably be compromised.

Another issue facing Italy is one of the demographics which is affecting the country´s economy. Italy is not spared the problem of an ageing population now witnessed in most European economies. However, an ever-declining share of young citizens can be attributed to migration. There is an immediate link between brain drain caused by highly-skilled workers leaving the country due to poor future prospects for the Italian economy and lacking domestic economic performance.

Italy is also seen to struggle with relatively high unemployment rates which amounted to 7.8% in December 2022 with only Greece (11.6%) and Spain (13.1%) marking even worse numbers. By comparison, the average unemployment rate in the EU was 6.6% while Germany only documented a rate of 2.9% and Malta of 3.2%. Moreover, when looking at the unemployment rates from 2022, the economic North-South divide within Italy´s macro-regions become evident: while the unemployment rate in 2022 in the North East was at 6.8%, the South documented a rate as high as 19.3% highlighting the poor employment in Mezzogiorno.  Even more concerning is the youth unemployment rates where Italy is among the countries with the highest rate posting 22.9% in January 2023, trailing the list again with Spain (29.6%) and Greece (28.9%) while the youth unemployment rate averages 14.4% in the EU/Germany leads the top with the lowest rate of 5.7%. Here again, the North-South divide comes to play with most young long-term unemployed living in the South and tend to have a limited educational background.

To conclude, it seems that Italy has not yet found the right balance between egalitarianism and efficiency when it comes to regulating growth, productivity and internal governance.

Italy can be said to have found itself in a self-reinforcing trap that needs a long list of reforms taking into account the North-South disparities and long-overdue investments in education and infrastructure to break the vicious cycle. With the award of €735 billion of EU aid it needs to be seen if the record allocation will mitigate the problems faced by Italy under new Prime Minister Giorgia Meloni.

Author: Lina Klesper - Legal Assistant PKF Malta
Published on Business Today: 16th March 2023
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