Italy : escaping the high debt and low-growth trap

Résumé 0

With its public debt amounting to 132.1% of GDP and its negative productivity growth over the last twentyyears, Italy appears to be the sick man of the European Union. In this Policy brief, we focus on its two mainplights: high public debt burden on the one hand, sluggish GDP and productivity growth on the other hand.Both issues are intimately related: a slow growth limits the budgetary margins and casts doubts on publicdebt sustainability; the reduced fiscal space in turn weighs on growth and public investment.The first part is dedicated to describing the history and causes of Italian public debt. A first phase, from the1960s to the 1980s, was characterized by a positive but moderate growth of debt. A second phase saw theexplosion of public debt, from 54% of GDP in 1980 to roughly 117% in 1994. The budget law of theAmato's government in 1992 initiated a third phase, marked by a significant fiscal consolidation effort, andthe decrease of the public debt to GDP ratio. The Great Recession interrupted this consolidation era and alast phase began from 2008 on, when the public debt-to-GDP ratio consequently increased. In the secondpart, we review some of the structural weaknesses of the Italian economy. We notably emphasize thespecialization bias towards low tech sectors, the “nanism” of Italian firms, the misallocation of talents andresources, the North-South divide and its related labor market consequences.We conclude with four policy recommendations for a revival of growth in Italy. Our first proposal istechnical and proposes a new European fiscal golden rule which would remove specific public investmentsfrom the computation of structural primary balance. Our second and third proposals are related to theregulation of the labor market, with the introduction of a minimum wage on the one hand, and thefacilitation of retraining policies on the other hand. Last, we call for a revival of industrial policies in order tofoster knowledge accumulation and firm learning. Our view is that Italy's fate is inextricably related toEurope's and that Italy needs more rather than less Europe.