Italian economy

Italy's economy, like the country's politics and culture, is full of contradictions. Italy is the third-largest economy in the eurozone – after Germany and France – and the seventh in the world. The country produces cars, fashion, design and delicacies, which Made in Italy: globally to a strong brand and products and manufacturers to concepts: Fiat, Valentino, Luxottica, Ferrero (Rocher, Nutella), Parmigiano and Prosecco, just to name a few. In addition, Italy has a cultural heritage and a variety of landscapes which attract about 50 million tourists every year.

Huge government debt, low productivity

But at the same time, Italy is struggling with a huge public debt, low productivity, a great contradiction between rich and poor, an even bigger one between North and South, and an unemployment rate of more than 12%, far above the European average.

In addition, Italian entrepreneurs, and ordinary citizens, are sighing under time-honoured plagues such as:

  • extremely high taxes, and of the reverse also a massive evasion;
  • a stifling bureaucracy;
  • a judicial process that is unparalleled in slowness (a civil law process fought out to the highest level takes an average of 9 years);
  • loss of income due to corruption and mafia;
  • and continued political instability without consistent policy continuation.

As a result, Italy has climbed out of the 2008-11 crisis much more slowly than most other EU countries and every year a quarter of a million Italians, including many well-educated young people – their unemployment rate is around 30% – are forced to to leave the country.

the recent corona crisis has hit Italy, also in economic terms, much harder than most European countries, so that the country now has an even greater debt burden and now really drastic reforms are needed in order to avoid bankruptcy or a 'restructuring' of the public debt in the long run. appearance.

North vs South

The economic situation of Italy is largely historically determined. This certainly applies to what is arguably the country's biggest problem: the Questione Meridionale, the problem of the poor South, and thus also of the contradiction between North and South.

Where the region Lombardy is one of the richest in Europe, comparable to Bavaria in Germany, is in Calabria barely half earned per capita, making this region one of the poorest in the eurozone.

Rich regions in the north, poor regions in the south (source: Wikimedia)

This difference has existed since Italian unification, when a predominantly agricultural, poor and illiterate South was joined by northern regions where industrial development and education had already progressed considerably. That gap has never been closed in a century and a half, although since the Second World War a total of 400 billion euros in state aid has been spent to help the South out of the economic doldrums.

Although prosperity has increased as a result, an economic tree as has not been done in the North. This is mainly due to the clientele way of doing politics in southern Italy. Government grants have all too often been used to buy votes, and to a significant extent have ended up with friends and supporters of local politicians or organized crime, without any centrally planned development.

The disastrous consequences of this are still visible in the form of hundreds of so-called 'cathedrals in the desert': unfinished, useless or never-used roads, viaducts, stadiums, convention centers and hotels.

The government-funded petrochemical industry in Sardinia has since gone bankrupt, while the ILVA plants in Taranto, Apulia, are so polluting that they are seriously considered to close too (also because of the deteriorating situation on the world steel market) with disastrous consequences for the already so scarce employment.

However, not all is hopeless in the southern Italian economy. Tourism has boomed in recent years, especially in Sicily and Sardinia and in Apulia en Napels.

Southern Italian wines and delicacies are doing very well in the European and American markets. Large industrial companies such as Fiat and Leonardo (defence) have important sites in the south. Sardinia led the way in digitization with Tiscali. And after years of fighting infiltration by the 'Ndrangheta, the Calabrese mafia, the port of the Gioia Tauro is well on its way to becoming a hub, a transshipment point, of world class.

Successive governments always have a minister for the Mezzogiorno, the South, who will finally tackle the problems structurally. But such announcements are certainly nothing new. For the time being, the growth of the South is still structurally lagging behind that of the North (already modest) and hundreds of thousands of young people are forced to move to Northern Italy or Northern Europe.

government influence

A second historical problem is the traditionally large state influence on the economy, which has been handed down from the fascist period and in which little changed in the first half century after the Second World War.

Italy has long been a country of state monopolies. The big banks were public, as were a large number of industrial companies, often rescued from bankruptcy with public money. In addition, capital exports were virtually banned and Italian companies were systematically protected with tariff walls and import restrictions: for example, until about 20 years ago, almost no Japanese cars were allowed to be imported and foreign airlines could not offer flights at prices below Alitalia's rates. That Alitalia has therefore never really become competitive and has been artificially kept alive for more than 30 years with constant new state aid.

For a long time, Italy thus exhibited the character of a command economy. In the early post-war years, this undoubtedly helped to get the country on its feet. In the long run, the government's hold on economic life, and with it that of the political parties, who saw state-owned enterprises primarily as job reservoirs for their supporters, has proved extremely damaging.

The current precarious situation of the (now privatized) Italian banks - too fragmented, too expensive, too many bad loans - and the agony of Alitalia, plagued by high staff costs, misplaced nationalism and poor policy choices - for which a further 2020 billion euros - are indirectly the result.

Miracolo Economico: the Italian economic miracle

After the Second World War, Italy was a penniless and underdeveloped country, as can be clearly seen in the neo-realistic films of those years. The infrastructures were largely destroyed or obsolete, in the countryside illiteracy was still widespread and millions of workers were forced to emigrate to Northern Europe, America and Australia.

In the 60s, that changed. With the support of US Marshall Aid and in an atmosphere of political stability – the Democrazia Cristiana was invariably the ruling party, governing with varying minor partners – the Italian version of Germany's Wirtschaftswunder unfolded, the Miracolo Economico, the Italian economic miracle.

The industries in the North, such as Fiat, Olivetti and Pirelli, grew like weeds. With government support, petrochemical complexes were built in Sardinia, in Apulia and near Venice. Under the wings of the public company Finmeccanica (largely privatized in 2000 and now known as Leonardo), a series of companies developed in the fields of machinery, defence, aviation and railcars.

State-owned energy company ENI drilled in North Africa and the Middle East and secured a position alongside the American Seven Sisters. Tourism boomed, not only in popular destinations on the Mediterranean and Adriatic coasts, but also in luxury resorts such as Capri and the Costa Smeralda in Sardinia, which was developed in those years.

Prosperity rose, so that more and more Italians could move in their brand new Fiats on the ultra-modern highway built at a rapid pace for the time. Emigration became less and less necessary: ​​in 1975 Italy had an immigration surplus for the first time since the war.

Steady on

In the seventies things went less well for Italy. Exponential growth came to an end. The oil crises of '73 and '79 hit the country hard, all the more so as it has hardly any energy resources itself, except for a number of hydroelectric power stations and a little oil in Molise. (In the 70s, Italy also had 4 nuclear power plants, but a popular vote in 1987, immediately after the Chernobyl disaster, decided to stop producing nuclear energy.)

Political tensions also increased after 30 years of Christian Democratic hegemony. The country has been ravaged by terrorism left and right, strikes and demonstrations, coup attempts and screeching inflation. In such a climate, the economy could hardly thrive and Italy was not at all interesting for foreign investors.

This is how the problems with the Italian economy arose

The tide turned in the 80s. The Socialists came alongside the Christian Democrats in a series of governments that pleased everyone:

  • employees with successive pay rounds and higher and earlier pensions;
  • employers with tariff walls, soft loans and export devaluations;
  • job seekers with the creation of not always necessary government jobs;
  • shopkeepers and other self-employed with massively tolerated tax avoidance;
  • and politicians and officials with increasingly high levels of corruption.

It was good for internal consumption and social peace, but disastrous for state finances. It was during these years that the foundations were laid for the current enormously high government debt, which rose in relation to GDP (Gross Domestic Product) from 55% in 1981 to 121% in 1994, when the corruption investigation Clean hands (Clean Hands) put an end to the biggest corruption and wasteful practices.

Subsequent governments (but not Berlusconi's) have tried to reduce debt, but without much success, also because national income barely increased.

The economy developed gradually in the last quarter of the last century. Fiat became a global player, partly due to the acquisition of brands such as Alfa Romeo, Ferrari and Maserati.

With Armani, Valentino and Ferré, Milan placed itself as European fashion city next to Paris. Thanks to Benetton, Stefanel and Marzotto, the production of fabrics and textiles also reached unprecedented heights.

And in regions Veneto, The Marches en Tuscany 'Districts' of large numbers of small and medium-sized enterprises arose which, often building on family traditions, with typical Italian imagination and inventiveness, supplied a multitude of high-quality products: shoes, leather goods, optics, chairs, screws and nuts, drills, car parts and so on.

The 90s are therefore regarded as the period of the second economic miracle, this time that of industry, especially in the Northeast.

Stagnation and crisis

Since the turn of the century, however, the Italian economy has stagnated. Entry into the eurozone has, on the one hand, led to a cut in interest rates, but has also eliminated the possibility of devaluation as an emergency measure to boost exports.

Globalization has exposed the small and medium-sized enterprises, which are the essence of Italian industry, to competition from low-wage countries, which also widely counterfeit Italian luxury products. As a result, many companies were forced to relocate their production facilities to Eastern Europe and the Far East.

However, unlike other (former) European troublemakers such as Ireland, Spain and even Greece, Italy has barely made a start on the reforms needed to get the economy back on track:

  • breaking down the bureaucratic barriers;
  • simplification of a horribly complex tax system that is a barrier to expansion and growth;
  • streamlining civil proceedings;
  • reducing the national debt;
  • tackling the black and gray circuit, which according to ISTAT (the Italian CBS) accounts for about 17% of the economy;
  • curbing tax evasion and corruption, which, despite the notorious Clean Hands processes of the 90s, continue unabated.

Responsibility for this lies primarily with politicians – and indirectly also with the citizens who have elected these politicians – who have not dared to take drastic and unpopular measures in all those years. This is especially true of the Berlusconi governments – 1994, 2001-06, 2008-11) that were very active in producing laws that were tailor-made for the prime minister suspected of corruption, tax fraud and sexual abuse of minors, but economically area roughly left everything as it was. For example, in 2011, in the darkest days of the crisis, Berlusconi asserted firmly that there was no crisis in Italy at all, because 'the restaurants are full'.

As a result, the economic crisis of 2008 hit Italy extra hard. Small businesses went bankrupt en masse. Unemployment rose. Between 2007-15 incomes fell by an average of 10,8% and house prices in the major cities by about a quarter. More in the South than in the North, widening the ancient rift once more.

The government debt rose further, to almost 2.500 billion euros, or more than 135% of GDP, at the outbreak of the corona crisis in 2020. Some banks went into crisis because individuals and entrepreneurs could not repay their loans and declined in the major cities. house prices by about a quarter.

Attempts at recovery

Since late 2011, a series of governments – Monti, Letta, Renzi and Gentiloni – have turned the tide somewhat. The banking crisis was averted. An unpopular but much-needed pension reform by Monti's minister Elsa Fornero cut social security costs. Under Renzi, the labor market was made more flexible and tax incentives were introduced for hiring young staff.

Since 2014, the economy has picked up again, albeit more slowly – +1,3-1,5% pa - than elsewhere in Europe. In 2018, the average per capita income was therefore still about 5% lower than in 2007. Despite the moderate growth, there seemed to be reason for optimism. Italy benefited from a number of favorable external factors:

  • the revival of the world economy was good for exports;
  • the low dollar and low oil prices made energy imports cheaper than usual;
  • thanks to the extremely low interest rate, government bond yields weighed less on the budget;
  • and by the policy of Quantitative Easing, or the large-scale purchase of Italian government bonds by the European Central Bank, the same interest rates remained extra low.

The governments Renzi (2014-16) and Gentiloni (2016-18) were not exactly frugal – Renzi in particular regularly dueled with the accountants in Brussels to be allowed to exceed the budget deficit as much as possible – but they did have grand plans for an organizational and economic reorganization of the country.

But their good intentions were put to a halt when Renzi in December 2016 a popular vote over a far-reaching constitutional reform. Renzi resigned and his successor Gentiloni continued his policy for more than a year, until the parliamentary elections of March 2018, which caused a political earthquake with major (and disastrous) consequences for economic policy.

Populists in power

The ballot box brought an unexpectedly big victory for two populist parties, which had already made considerable progress in the years before: the (not quite rightly) left-wing Five Star Movement (M5S) and the Lega, a continuation of the old Lega Nord, which had been transformed in just a few years by its leader Matteo Salvini from a northern Italian autonomy movement into a right-wing nationalist party modeled on the French National Front.

At first glance, the two had little in common:

  • the M5S as a fierce opponent of large-scale industrial projects such as the HSL Turin-Lyon, the Trans Adriatic Pipeline and the rescue of the heavily polluting steel concern ILVA, and the Lega as a strong supporter of all this;
  • the M5s as champion of the poor in the south and the League as those of the well-earning northern entrepreneurs and workers;
  • the Lega as a party with a powerful Leader whose will is law and the M5S who championed direct democracy through the web.

But they did have two things in common: the revulsion and envy of the traditional parties and a fervent desire to come to power themselves. And so it happened that in June 2018, these two alleged ideological opposites came to rule together, with a program (described by them as a 'contract') that could only come about by combining the main election promises of both partners.

The cautious reform policies of previous governments were jettisoned and, at the urging of the M5S, a 'citizenship income' of €780 per month was introduced for those without solid sources of income. At the initiative of the Lega, but with the support of the M5S, the increase in the retirement age was partially reversed. And the Lega managed to get a small tax cut for entrepreneurs, even though its initial promise of a very low (15%) flat tax was soon forgotten.

Both cases involved costly measures for non-productive investments, also described as expensive gifts to buy votes. Citizenship income would lead to more work, according to M5S leader Luigi Di Maio, because it was linked to a duty to accept jobs that would be tracked down by a team of so-called 'navigators'. (Formally, employment offices already existed for this, but their malfunctioning is proverbial in Italy.)

And for every worker who retires early, there would be at least two jobs available for the young unemployed. In practice, nothing came of it. The plan of the navigators (devised by an Italian-American professional who is best known for his extremely high expense reports) got stuck in the initial phase and early retirees were often not followed up, also because the hiring of new staff due to the uncertain political and economic situation. situation didn't seem very appealing.

When the 'yellow-green' cabinet finally disintegrated in August 2019, after months of quarrels and rivalries, with Salvini in particular proving himself to be his fight against illegal immigration, no progress had been made economically and the major reforms needed were still an issue. illusion.

The corona crisis

After the completely unexpected summer government crisis and its equally unexpected outcome, a 'yellow-red' cabinet of M2019S and Partito Democratico was able to start in September 5, without by-elections and notably with the same prime minister, Giuseppe Conte.

As in the previous cabinet, the M5S was the largest on paper (and in parliament), but the agenda was largely set by its partner. Finance Minister Roberto Gualtieri (PD), a man with extensive experience in Europe, took it upon himself to continue the policy of gradual reform of bureaucracy, judiciary and tax authorities, which Renzi and Gentiloni had barely got around to.

In doing so, he did not reverse the main reforms of his immediate predecessors: in practice, without the farce of the navigators, the citizenship income is simply a welfare benefit, which the left-wing PD is not really opposed to, and the early retirements involve a three-year measure that will expire in 2021 and which will certainly not be extended.

But Gualtieri did not have time to initiate a new policy. The first months of the new government were spent on the formulation and handling of the budget for 2020 and shortly afterwards the corona crisis put a damper on all good intentions. 

Italy is the country in Europe hardest hit by the virus, with more than 30.000 fatalities between March and May 2020, next to Spain. Also from an economic point of view, GDP is estimated to fall by 2020-9% in 10, while billions more will have to be spent on aid and unemployment benefits.

The national debt thus rises from 135% to 150-160% of GDP, an astronomical figure that makes the economic situation of the country even more precarious. But the crisis has also freed up European 'recovery funds', giving Italy, in addition to €80 billion for emergency aid, an additional €172 billion in soft loans in the coming years to combat the effects of the pandemic.

Prime Minister Conte presented this at the beginning of June as a 'historic opportunity' to finally implement the structural changes Italy has been waiting for so long:

  • modernization
  • digitization
  • electronic payment (also useful against tax evasion that costs the Italian treasury about 130 billion euros annually)
  • fighting the informal economy
  • innovation
  • broadband
  • recapitalization of companies
  • sustainability (Green Economy)
  • research (also to bring back emigrated Italian scientists)
  • justice reform (also to attract foreign investors, who are still shy due to the prevailing legal uncertainty)
  • tax reform (to end inequality and inefficiency)
  • and less and simpler bureaucracy (the failure of which was already apparent in the slow and inadequate disbursement of support funds during the corona crisis).

All this is based on a technical plan with 100 concrete projects, which will be presented in June 2020.

In short, the problems have been inventoried, the funds are there, now the practical implementation is yet to be done. But Italy has not been very strong in this regard in recent years.

The Italian Economy, Now What?

In addition to the consequences of the corona crisis and the well-known flaws of bureaucracy, justice and tax, Italy also faces other structural obstacles to economic life. Growth is limited by the power of lobbies and monopolies, which impede competition from the free market. Due to the low meritocracy in a society in which clientelism, nepotism and recommendations are the rule, the best people do not always end up in the right places.

Italy spends significantly less than other European countries on education and research, both privately and in business, as a result of which the employees are less developed and therefore less versatile. Also, the Italian school system is severely outdated and universities and colleges are poorly geared to business needs. (The Renzi government has launched an education reform that may now be followed up.)

And the collapse of the Morandi Viaduct near Genoa in August 2018 has once again highlighted the urgency of action in the country's infrastructure. The main highways, bridges, viaducts, tunnels and (regional) railways are now 40-50 years old and in many cases suffer from long years of overdue maintenance: Italy is not very strong at all in maintenance and prevention. That also promises to be an additional billion dollar item.

Finally, organized crime, although hard hit by the Italian justice system in recent years, still accounts for an estimated 7% of the Gross Domestic Product, with the same damage in the form of tax evasion and distortion of competition.

Opposite the rather rosy picture outlined above, there is also another reality. That of a country where people work hard and seriously, with passion and fantasy and which deliver beautiful, good and tasty products. Whether it's fashion, or yacht building, cars, motorcycles, helicopters, glasses, film, wine or delicacies, Italy is fully involved in the world premier league, in many cases in first place.

And rebuilding the collapsed Morandi Bridge in less than two years, bypassing the usual time-consuming bureaucratic procedures, shows that when it really has to be, Italy can be fast and efficient too. Add to that the country's magnificently varied landscape and unique cultural heritage, well, then the basis also seems to be there for a less bleak future.

This information has been written and checked by Aart Heering, journalist and historian.