Italy at a Crossroads

It is now a year and a half since Matteo Renzi took over as Italy’s Prime Minister on February 22, 2014.

Since then, Mr. Renzi, who is the second-youngest national leader in Europe, has sought to deal with the difficult task of implementing the much-needed economic reforms demanded by the European Union and the International Monetary Fund.

Renzi is keen to restore market confidence and revamp the Italian economy (real GDP will post a poor 0.7% of growth in 2015 and 1.2 in 2016, according to the IMF).

Actions have been taken to boost job creation and growth, improving domestic competition and easing the burden of bureaucracy — which impedes an otherwise dynamic private sector.

“If fully and effectively implemented, these reforms could contribute to improving competitiveness and addressing some long-standing obstacles to growth,” wrote the European Commission in a recent report.

Despite this progress, Italy remains under close scrutiny from international markets – and for good reasons. Unemployment is over 12%, GDP growth is sluggish and perhaps most critically, the economy is still 9% below the peak it reached before the global financial crisis unfolded in 2008.

Only a political crisis

In its latest report on Italy, the OECD wrote that ”the lack of recovery from recession is leading Italy’s income per capita to fall further behind the leading OECD economies. The productivity performance continues to lag and labor force participation remains weak.”

Yet, it would be a mistake to consider the country as a dead man walking. Italy is experiencing a crisis of confidence that is both domestic and international.

However, the current crisis is primarily rooted in the political realm. Renzi is focused on fixing that dimension with various long overdue institutional reforms.

The economic significance of the Bel paese still is quite remarkable. Italy is the third-largest economy of the eurozone and the 8th largest in the world, measured by nominal GDP.

It is also the world’s 11th largest exporter, generating around 3% of world merchandise trade. Not only that.

Italy is among the countries that have maintained the highest world market shares throughout the globalization process (it kept 72.6% of the share of world exports of manufactured goods it held in 1999, outperforming the likes of France, Japan and UK).

Goods “Made in Italy” – from fashion to food – are topnotch. Italy also has the second-largest industrial output of Europe, behind Germany. The Bel paese attracts over 47 millions tourists every year, placing it among the world’s top five tourism destinations.

One of Italy’s biggest economic troubles – together with tax evasion and hidden economy — is its massive public debt (around 132% of GDP). That is the second-biggest public debt as a percentage of GDP among all the eurozone countries.

An economic success story

However, according to the European Commission’s analysis of the sustainability of the public finances of the Member States in the short, medium and long term, Italy’s risk level is below the euro area average.

In contrast to public debt, Italy’s private debt is one of the lowest among developed countries – and its household wealth is one of the highest. What is more, if you take out interest payments from the debt equation, Italy holds a primary surplus (1.7% of GDP in 2014).

As a matter of fact, Italy’s primary surplus is among the highest in the world and has been the most stable among EU member states in the past 20 years.

For all those who believe that Italy is not getting its public debt under control, it is also worth noting the reason behind this.

A part of the Italian public debt increase from 2012 to 2014 is due to the financial aid given by Italy to struggling European countries, as well as to the European financial instruments created during the economic crisis (a total funding of 60 billion euros).

Italy is still a rich country, with its people being the most precious asset. However, during the past decade, not enough attention was given to the needs of younger generations – the inventors of tomorrow.

According to the National Statistics Bureau, youth unemployment is around 44%, while the NEETs (Not in Education, Employment or Training) counts more than two million people. Improving these numbers, Mr Renzi said, is the number one priority of his government.

Effective implementation of reforms

The Jobs Act was one of a series of regulatory reforms aimed at reinvigorating the economy and intended to bring about greater flexibility to the Italian labor market, removing in particular barriers to hiring. It was approved by parliament last December and has been largely implemented.

Beyond that, the reform package is moving forward. In the eyes of the IMF, “reforms of product and services markets, public administration, education, judicial, and tax system are also progressing.”

Key for the proper execution of all of these measures will bring political stability. Renzi has the determination to see the required changes through, so that Italy will at long last operate on a sounder footing.

While big challenges remain, with the economy showing signs of recovery and a Prime Minister determined to hold office at least until the next scheduled elections planned in 2018, Italy can hope for much-needed political stability.