Italy struggles to cobble together a government after populist parties on both sides of the political spectrum won more than half of the votes in the latest elections, proving that the populist wave in Europe has not run its course yet. High public debt and a struggling economy make Italy’s the Achilles’ heel of the Eurozone.
Four years ago I wrote a somewhat irreverent piece on Italy: it struck me that the Monty Python’s ‘dead parrot’ sketch provided the best economic analysis of the country. Four years later, it still does.
You can find the original article here – I think you will find it amusing, especially if you are familiar with Monty Python’s comic genius. In this blog I will just stress a few points, with updated statistics.
The immigration crisis has been the main driver of this populist surge; but it has been compounded by popular discontent with the economy. Yet Italy’s economy has been on an upswing for the last three years, peaking at a robust 1.5% GDP growth in 2017.
Why is economic dissatisfaction peaking just as the economy is doing better? For a very simple reason, in my view: Italy’s long-term economic underperformance is so severe and deep-rooted that the current cyclical upswing barely makes a dent. Consider:
Real per capita income last year was barely above the 1998 level. That means living standards are roughly the same as they were twenty years ago. Over the same period, they rose by 28% in Germany and by 17% in France. This is not just the impact of the double recession (2008-09 and 2012-13): real per capita incomes stagnated between 2000 and 2005, well before the financial crisis.
Youth unemployment runs at 37%. Most observers blame it on the latest two recessions and the austerity policies needed to keep the budget deficit under control. But youth unemployment in Italy has always been high: between 1994 and 2000, when the economy expanded at an average of 2% -- its strongest average pace in the last 30 years—youth unemployment averaged 33%.
Let me repeat this: when Italy’s growth was at its strongest, one young person in three was unemployed—pretty much the same as today. You can’t blame it on austerity, you can’t blame it on the latest recession, and you really can’t blame the robots: this is a severe structural problem.
The same holds for Italy’s languishing productivity growth: for the last twenty years, productivity has barely budged, inching up at a glacial 0.2% per year. One hour worked today yields a mere 4% more in output than it did twenty years ago – which explains why real incomes have stagnated.
Lack of productivity growth is Italy’s number one problem, not the euro—which has become the scapegoat of choice. Having your own currency is no panacea, and a central bank cannot print higher living standards—just ask Venezuela or Zimbabwe.
Italy’s industry still has world-class pockets of excellence, including in state-of-the-art technologies. Some of the latest innovations, like additive manufacturing, could play to Italy’s advantage by enabling greater efficiency at smaller scale. But they could also accelerate its economic decline unless Italy acts soon to improve its position in a highly competitive global economy.
Twenty years of stagnation have eroded living standards and sapped confidence in the future, driving young Italians to leave the country in record numbers. Meanwhile public debt has risen to about 130% of GDP.
Against this background, the economic policy measures proposed during the election campaign ranged from universal basic income, to cutting taxes with no matching reduction in public spending, to rolling back previous pension reforms. None of this is realistic--or affordable.
Pretending the problem does not exist will not make it go away. The solutions are obvious, but they are hard: more reforms, a better education system, a leaner public sector. A turnaround can only begin by recognizing that this parrot is dead.