Opinion

“It’s true, Italy breaks your heart.”

The brash, 39-year old, Matteo Renzi is Italy’s third unelected Prime Minister since November 2011. Mario Monti lasted 18 months, and his successor, Enrico Letta resigned last week after less than a year in office.  The generational leadership change is an opportunity. But can Italy break from its past?

By: Date: October 10, 2014 Topic: European Macroeconomics & Governance

This opinion was published by Handelsblatt, the Guardian and El Pais.

The brash, 39-year old, Matteo Renzi is Italy’s third unelected Prime Minister since November 2011. Mario Monti lasted 18 months, and his successor, Enrico Letta resigned last week after less than a year in office.  The generational leadership change is an opportunity. But can Italy break from its past?

Short-lived Italian governments are the norm. The unending political drama reflects the competition for power and resources amidst entrenched economic malaise. Chronically unable to put their economic house in order, Italian elites are again thrashing around for a solution, this time at the risk of losing democratic legitimacy.

The simple statistic is that Italian public debt is 132 percent of GDP—and rising. The International Monetary Fund projects that the debt ratio could start falling if the government undertakes heroic belt-tightening. That means a primary budget surplus (not accounting for interest payments) rising to 5 percent of GDP, and possibly staying near that high level for years beyond.

Such extraordinary levels of persistent austerity can fray the political fabric. They can also be economically disastrous.

Austerity is to be accompanied by the elixir of structural reforms to spur growth. Even if these reforms materialize, economist Gauti Eggertsson warns that things get worse before they get better. The decline in prices needed to regain competitiveness will cause the debt burden to rise and demand to fall. Anemic growth and deflationary conditions will relentlessly follow, and the already distressed banks could be pushed into seizure. In January 2014, annual inflation was down to 0.6 percent from 2.4 percent a year earlier.

Italy has lived at the edge for four decades. Earlier, the option existed of inflating away the debt and devaluing the exchange rate to regain a foothold in global markets. The Italian lira underwent repeated devaluations between 1973 and 1976 and the devaluation in 1992 brought the euro’s precursor—the Exchange Rate Mechanism—to its knees.

The euro was expected to bring new discipline. It demanded discipline because it closed the traditional vents of inflation and exchange rate depreciation. The euro—which failed to garner support in two European national referendums, and would have failed others—enjoyed support among Italians weary of their irresponsible leaders.

But, introduced in January 1999, the euro did not help. Any early signs of a new resolve vanished as the swift fall in interest rates eased the pressure.

An October 2001 IMF assessment of Italy concluded: “Growth has disappointed over the past decade … and major fiscal challenges remain.” The report spoke of deep-rooted structural problems and “difficult choices in streamlining public spending.” Over the succeeding years, nothing changed. The IMF’s annual reports predictably repeated the same messages to no avail. Those admonitions continue to carry an eerie relevance today.

The presumption is that the looming threat of disaster will finally summon the political will and the economic patience to endure the grim years ahead, while Italy’s bondholders are kept at bay by the European Central Bank’s Outright Monetary Transactions program. But is Italy up to the challenge?

The American scientist and author, Jared Diamond has warned that crises do not always lead to renewal. Exhausted societies cannot summon the energy to respond to a new crisis. Italy is stuck producing goods that can be made more cheaply in low wage countries. In the OECD’s 2012 Programme of International Student Assessment of 15 year-olds (PISA) in maths, science and reading, Italian students lagged their advanced country counterparts. Research and development have fallen woefully behind.

It is possible that Italy will thread the eye of the needle. But it is easier to see scenarios in which Italian growth and inflation are even weaker than now projected and debt ratios keep rising. At what point do bondholders gratefully take the ECB’s offer to repay them? If the legality of that offer is then in question—or since the ECB’s purchases are “effectively limited”—things could get ugly.

The policy choice is straightforward. To stay the course and keep fingers crossed or to take bolder action now to prevent future catastrophe.

Italy can no longer tinker. A true generational change in course, one that harnesses the aspirational energies of a brighter future, requires audacious investment in education and infrastructure. This must be paid for by new budget priorities and, importantly, by negotiating Uruguay-style, longer terms of repayment with creditors. That bargain is in everyone’s interests, and is needed to keep Italy in the eurozone.

As Mr. Letta left office, he sorrowfully remarked to his associates, “It’s true, Italy breaks your heart.” The stakes are high. Italy may break more than that.

Read more from Ashoka Mody on Italy

Austerity Tales: the Netherlands and Italy

The Italian fault line

Why does Italy not grow?

Europhoria once again


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 [email protected].

Read article Download PDF More on this topic More by this author
 

External Publication

The Value of Money, Controversial Economic Cultures in Europe: Italy and Germany

A discussion of Italian and German macro-economic cultures and performances.

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: June 10, 2021
Read about event More on this topic
 

Past Event

Past Event

An alpine divide? Comparing economic cultures in Germany and Italy

A discussion of Italian and German macro-economic cultures and performances.

Speakers: Thomas Mayer, Patricia Mosser, Marianne Nessén, Hiroshi Nakaso, Francesco Papadia, André Sapir and Jean-Claude Trichet Topic: European Macroeconomics & Governance Date: April 13, 2021
Read about event More on this topic
 

Past Event

Past Event

Think green act local: the role of the G20 in sustainable infrastructure

In this workshop, invited guests will discuss priorities and proposals for the Italian G20 Presidency for a green local infrastructure agenda.

Speakers: Amar Bhattacharya, Marco Bucci, Adriana Calderon, Maria Demertzis, Matthias Helble, Elly Schlein, Niclas Poitiers and Gelsomina Vigliotti Topic: Energy & Climate Date: March 15, 2021
Read article Download PDF More on this topic
 

Working Paper

COVID-19 credit-support programmes in Europe’s five largest economies

This paper assesses COVID-19 credit-support programmes in five of the largest European economies, and examines how countries have dealt with trade-offs raised by the programmes.

By: Julia Anderson, Francesco Papadia and Nicolas Véron Topic: European Macroeconomics & Governance Date: February 24, 2021
Read article More on this topic
 

Blog Post

Growth uncertainty, European Central Bank intervention and the Italian debt

European Central Bank intervention provides a buffer against the uncertainty faced by European Union economies in the face of COVID-19. For the time being, this intervention has alleviated concern about Italy's debt, but without it Italy is vulnerable to a debt crisis.

By: Andrea Consiglio and Stavros Zenios Topic: European Macroeconomics & Governance Date: October 28, 2020
Read article More on this topic
 

Opinion

Why OMT is not the solution for Italy right now

The Outright Monetary Transactions tool is not well suited for Italy right now. Italy needs fiscal support both by itself and by the EU. Italy and the rest of the EU need a fiscal bazooka. We should find a way of backstopping our economies immediately.

By: Maria Demertzis and Bruegel Topic: European Macroeconomics & Governance Date: March 16, 2020
Read article More on this topic
 

Blog Post

To save the Italian economy from the Coronavirus, Rome prescribes a stimulus

Faced with a difficult prognosis, the Italian government has prescribed a three-step strategy to treat the worse economic symptoms of the Coronavirus. The medicine is money and the dosage is €4.5 billion

By: Simone Tagliapietra and Bruegel Topic: Global Economics & Governance Date: March 3, 2020
Read article More on this topic
 

Opinion

Under swollen tides, Venice says more about our future than our past

While tides high enough to submerge Venice used to be rare, occurring every two to three decades, they have now become increasingly regular. Five of the ten highest tides in recorded history occurred over the last 20 years, with the most recent one having occurred just last year. Is this the new normal?

By: Simone Tagliapietra and Bruegel Topic: Energy & Climate Date: November 18, 2019
Read article More on this topic
 

Blog Post

Talking about Europe: La Stampa 1940s-2010s

An on-going research project at Bruegel seeks to quantify and analyse printed media discourses about Europe over the decades since the end of the Second World War. In this third blogpost, we carry out the exercise on 9.9 million articles from an Italian daily newspaper, La Stampa. The trend increase in the frequency of European related articles, previously found looking at the French and German press, is confirmed in the case of Italy.

By: Enrico Bergamini, Emmanuel Mourlon-Druol, Francesco Papadia and Giuseppe Porcaro Topic: European Macroeconomics & Governance Date: October 22, 2019
Read article More on this topic
 

Opinion

Why Europe needs a change of mind-set to fend off the risks of recession

Recession! This is the new worry in Europe and the US. A simple look at google trends shows that in Germany, France and the US, search interest for recession peaked in the last weeks. In Italy, the peak already occurred end of January. Whether a recession is actually occurring is difficult to gauge in real time. But there can be no doubt that significant risks such as the trade war and no-deal Brexit exist.

By: Bruegel and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: September 2, 2019
Read article More on this topic
 

Blog Post

‘Lo spread’: The collateral damage of Italy’s confrontation with the EU

The authors assess whether the European Commission's actions towards Italy since September 2018 have had a visible impact on the spread between Italian sovereign-bond yields and those of Germany, and particularly whether the Commission’s warnings have acted as a ‘signalling device’ for bond-market participants that it might be difficult for Italy to obtain the support of the ESM or the ECB’s OMT programme if needed.

By: Grégory Claeys and Jan Mazza Topic: European Macroeconomics & Governance Date: July 8, 2019
Read article More on this topic
 

Blog Post

GNI-per-head rankings: The sad stories of Greece and Italy

No other country lost as many positions as Greece and Italy in the rankings of European countries by Gross National Income per head, between 1990 and 2017. The tentative conclusion here is that more complex, country-specific stories – beyond the euro, or the specific euro-area fiscal rules – are needed to explain these individual performances.

By: Francesco Papadia and Bruegel Topic: European Macroeconomics & Governance Date: June 18, 2019
Load more posts