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: and Date: February 28, 2018 Topic: European Macroeconomics & Governance

For the first time since the end of the euro-zone crisis, Italians will be heading to the polls on March 4. Ahead of this political event markets seem extremely quiet, with the spread between the 10-year Italian government bond yields and German bunds at the lowest level since October 2016. The 5-Years Sovereign credit-default swaps (CDS) follow a similar path.

This financial calm is likely due to two main reasons: first, most Eurosceptic parties have toned down their anti-euro rhetoric in an effort to attract moderate voters. Second, a new largely proportional electoral law makes it virtually impossible for the anti-establishment Five Star Movement (M5S) to gain an outright majority in Parliament.

While limiting the downside risk of an anti-establishment government, the new electoral law combined with the latest polls, suggests that the most likely outcome of the election will be a gridlock. Having already seen this happen in Spain, the Netherlands, and most recently in Germany, and observing strong business confidence indicators and solid growth figures, euro-zone watchers and international commentators seem to have entered a generalised sense of detachment.

This lack of concern might be appropriate for the very short term but misses the bigger picture. In contrast to the other countries mentioned, Italy still needs a profound economic shake-up and is in no position to afford months or years of dormant governments.

Reading trends beyond the current cyclical upturn, growth in potential output is close to zero, productivity has been practically flat for almost two decades, and the country sits on the fourth-largest public-debt-to-GDP ratio (134%) in the world. Since the turn of the century, Italy has been systematically growing less than its euro-area peers in good times and contracting more in bad times (Figure 1), suggesting deep domestic structural issues. A further sign of this economic malaise is the fact that migration out of Italy is at the highest level since the end of the Second World War (in the order of magnitude of 250,000 in 2015 alone).

Some important reforms have been implemented over the past few years: a significant increase in the viability of the pension system, liberalisation of the labour market, reorganisation of the banking sector, and first steps taken to abridge the length of judicial proceedings. These are important measures that go in the right direction, but further progress will be needed. Borrowing finance minister Pier Carlo Padoan’s famous metaphor, Italy’s path to a better macroeconomic equilibrium is “narrow” and characterised by prudent fiscal policies combined with a sustained reform effort. Political gridlock or patchy government majorities will make it even narrower.

In a recent Bruegel paper, Müller et al (2018) have shown how the Italian media has portrayed the crisis of past years as due to externally imposed austerity and “unfortunate circumstances”. It is perhaps unsurprising then that, as Lucrezia Reichlin has remarked, instead of discussing how to tackle the country’s long-term structural issues, the current political campaign has seen parties trying to outbid each other with headline-grabbing fiscal promises. These include a (low) flat income tax (Forza Italia), the abolition of the aforementioned Monti-era pension reform (Lega), or the introduction a universal basic income (M5S), just to mention a few. Even under the most benign forecasts, these measures would all significantly prod up public debt in a country where interest payments hover around €66.3 billion a year. To put this into perspective, in 2016 total (direct and indirect) public investment was below that figure (€57.3 billion).

As Francesco Papadia elegantly framed it, Italy lives through a euro-zone impossible trinity: you cannot be in the euro, honour your public debt, and have a broadly stagnant economy. If we factor in that a global recession took place on average every seven or eight years over the past 50 years, there is a high likelihood this will happen again during the course of the next legislation. At that point, and with the scars of the last crisis still healing, it is not hard to imagine parts of a fragile government coalition pushing for the first or second unpalatable options of Papadia’s trilemma.

With this prospect in mind, the current lack of concern with the Italian elections may be suggestive of a calm before the storm.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event More on this topic
 

Upcoming Event

Apr
13
13:00

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 Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article Download PDF More on this topic
 

Working Paper

Interest in European matters: a glass three-quarters full?

Everything that increases the interest of European citizens in the EU, independently of whether it has a critical or a supportive character, will serve to move the EU closer to its citizens.

By: Francesco Papadia, Enrico Bergamini, Emmanuel Mourlon-Druol and Giuseppe Porcaro Topic: European Macroeconomics & Governance Date: March 23, 2021
Read about event More on this topic
 

Past Event

Past Event

The impact of COVID-19 on productivity: preliminary firm evidence

Online event organised in the framework of MICROPROD, a research project to improve our understanding of productivity, its drivers and the way we measure it.

Speakers: Carlo Altomonte, Agnès Bénassy-Quéré, Maria Demertzis, Filippo di Mauro and Steffen Müller Topic: European Macroeconomics & Governance Date: March 18, 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 by this author
 

Opinion

Will COVID accelerate productivity growth?

The COVID-19 pandemic has prompted an increasing number of rich-country firms to reduce their reliance on global supply chains and invest more in robots at home. But it is probably too soon to tell whether this switch will increase productivity growth in advanced economies.

By: Dalia Marin Topic: European Macroeconomics & Governance, Global Economics & Governance Date: February 10, 2021
Read article Download PDF
 

Policy Contribution

The productivity paradox: policy lessons from MICROPROD

The objective of MICROPROD, an EU-wide research project that runs until the end of 2021, is to understand what is driving the current productivity slowdown and what the potential consequences are for Europe's economic model and its citizens’ welfare. This Policy Contribution summarises the main, policy-relevant conclusions of the 20 MICROPROD papers delivered so far.

By: Grégory Claeys and Maria Demertzis Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: January 6, 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 by this author
 

Opinion

Europe’s recovery gamble

Next Generation EU, was rightly hailed as a major breakthrough: never before had the EU borrowed to finance expenditures, let alone transfers to member states. But the programme and its Recovery and Resilience Facility amount to a high-risk gamble.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: September 25, 2020
Read about event
 

Past Event

Past Event

The Sound of Economics Live: The State of the Union going forward

In the first Sound of Economics Live episode after summer we look at the State of the Union address delivered by Ursula von der Leyen.

Speakers: Giuseppe Porcaro, André Sapir, Guntram B. Wolff and Alicia García-Herrero Topic: Energy & Climate, European Macroeconomics & Governance, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 16, 2020
Read article More on this topic More by this author
 

Opinion

Without good governance, the EU borrowing mechanism to boost the recovery could fail

The European Union recovery fund could greatly increase the stability of the bloc and its monetary union. But the fund needs clearer objectives, sustainable growth criteria and close monitoring so that spending achieves its goals and is free of corruption. In finalising the fund, the EU should take the time to design a strong governance mechanism.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: September 15, 2020
Read article Download PDF
 

Policy Brief

Rebooting Europe: a framework for a post COVID-19 economic recovery

COVID-19 has triggered a severe recession and policymakers in European Union countries are providing generous, largely indiscriminate, support to companies. As the recession gets deeper, a more comprehensive strategy is needed. This should be based on four principles: viability of supported entities, fairness, achieving societal goals, and giving society a share in future profits. The effort should be structured around equity and recovery funds with borrowing at EU level.

By: Julia Anderson, Simone Tagliapietra and Guntram B. Wolff Topic: Energy & Climate, European Macroeconomics & Governance Date: May 13, 2020
Load more posts