The Italian economy is experiencing strong recovery
THE Italian economy is experiencing an unexpectedly strong recovery. The latest good news came on September 12th with the release of figures showing that the national unemployment rate had fallen 0.4 percentage points during the second quarter to 11.2%. The day before, the government’s statisticians reported a 4.4% year-on-year increase in industrial output. Currently Italian GDP is growing at 1.5% a year. That is still modest—less than the 2.2% being achieved by the euro zone as a whole. But the gap has been narrowing. Is the Italian economy, which for years has been a brake on the progress of the single-currency area, at last getting back up to speed?
Italy’s prime minister, Paolo Gentiloni of the center-left Democratic Party (PD), said the rise in industrial production “would have been unthinkable only two years ago”. But he might just as validly have chosen a much longer time span: the Italian economy has been wallowing in the shallows for almost two decades. It repeatedly grew more slowly than other European economies in the good times and shrank faster in the bad ones. The financial and euro crises of 2008-11 made things a lot worse. But the underlying problems, which include low productivity, too few big corporations, sky-high public debt, a fragmented banking system, limited competition, slow civil justice and underfunded, underperforming universities, were all handicaps before.
These structural defects persist and make it hard to be unequivocally optimistic. Most economists agree Italy is, to a large extent, benefiting from the broader upswing in Europe. It has long depended heavily on exports, and Germany and France are its biggest customers. But important changes have been introduced. A state bail-out in July of Italy’s oldest bank, Monte dei Paschi di Siena, and the rescue of two lenders in the Veneto region has left the financial sector looking much healthier. The banks have also begun offloading a mountain of bad loans. Oxford Economics, a think-tank, calculates that deals so far announced suggest €60bn-70bn ($72bn-84bn), or about a third of the total, can be sold off by the end of the year. That in turn should encourage bankers to lend more freely, spurring further growth.
Arguably, the biggest potential snag is not economic, but political. Structural reforms usually anger vested interests. They need governments with agreed programs and stable majorities, able to weather temporary unpopularity. Italy’s next election, which has to be held by May, is likely to produce anything but. After being mauled by the Constitutional Court, the electoral laws—one for each of the houses of parliament—are based largely on proportional representation. Unless new rules can be agreed before next spring (and there is no real sign yet that they can), the anti-establishment Five Star Movement (M5S) should win 25-30% of the seats. Since the M5S refuses to co-operate with any of the mainstream parties, it could force the formation of a government that includes disparate elements of the right and left. The most likely alternative on current poll showings is a conservative minority coalition including Silvio Berlusconi’s Forza Italia party, the protectionist Northern League and a smaller party with its roots in neo-fascism. The chances of such a government agreeing on a liberal reform agenda are remote.