Social Europe

politics, economy and employment & labour

  • Themes
    • Strategic autonomy
    • War in Ukraine
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter

Seven ‘surprising’ facts about the Italian economy

Philipp Heimberger and Nikolaus Krowall 25th June 2020

Why would affluent northern-European taxpayers want to pour money into an Italian economy that is a basket-case? Except it isn’t.

Italian economy
Philipp Heimberger

Behind the deadlock exhibited at the June European Council over the recovery fund lay continued scepticism among northern member states of the eurozone as to the entitlement of southern members to substantial financial support—most especially Italy. This disposition is however based on images of the Italian economy and fiscal policies which are at odds with the data.

That is no accident: over the course of the financial and eurozone crises of recent times, economists, politicians and media have conveyed a distorted picture of Italy and its economy—clichés which European political leaders such as the Dutch and Austrian prime ministers still use today. They fail to recognise that Italy is the second largest producer of industrial goods in the EU, has been running export surpluses over recent years and has often adhered more strictly to the European Union’s fiscal rulebook than Germany, Austria or the Netherlands.

Italian economy
Nikolaus Krowall

So here are seven myth-defying data about the Italian economy.

1. Italy is living below its means

‘Italy is living beyond its means!’ This omnipresent claim is readily supported by pointing to Italy’s public debt, which amounts to 135 per cent of its economic output. Yet this means only that the public sector is highly indebted—it says nothing about the Italian economy as a whole.


Our job is keeping you informed!


Subscribe to our free newsletter and stay up to date with the latest Social Europe content. We will never send you spam and you can unsubscribe anytime.

Sign up here

A country lives beyond its means if it imports significantly more goods and services than it exports over the long term. A country that exports as much as it imports is not however living beyond its means, as production and consumption are in line. Indeed, Italy has been recording export surpluses since 2012. Italy’s export surpluses are by no means only due to tourism, as the country exports more industrial goods than it imports. The Italian economy therefore consumes less than it produces—it lives below its means.

Italian economy
Source: AMECO (spring 2020), own calculations

2. Private debt is not a problem in Italy

If the Italian economy as a whole has not been living beyond its means, the problem of debt must be confined to the public sector. This is indeed the case: Italy’s private-sector debt relative to gross domestic product is relatively low by the standards of the Organisation for Economic Co-operation and Development. This also illustrates that high debt-to-GDP ratios are not a problem across all sectors of the Italian economy.

Italian economy
Source: OECD

3. Public debt is high because of errors made 40 years ago

If the economy is not excessively indebted, why is the state so ailing? As disastrous as the performance of Italian domestic politicians from Silvio Berlusconi to Matteo Salvini has been, high public debt is primarily a legacy from the 1980s. Furthermore, the mistakes that were made 40 years ago took place in an international environment of increasing interest rates. Since then, the Italian state has been carrying a heavy interest-rate backpack. If we exclude the burden of interest rates, however, the Italian state has been consistently running budget surpluses since 1992 (with the exception of the crisis year 2009).

Even Germany, Austria and the Netherlands have recorded a comparable positive ‘primary’ budget surplus less frequently than Italy. The Italian state has not been as ‘profligate’ as is often claimed: it has consistently collected more in taxes than it has spent. But the interest burden—high due to legacy debt—has repeatedly pushed the overall budget balance of the Italian state into negative territory. By the way, Italy has so far also been a net contributor to the EU budget.

Italian economy
Source: AMECO (spring 2020), own calculations

4. Italy’s economy has suffered since joining the euro

Italy’s government debt is also marked because its economic growth has been so weak over the last 20 years—being presented as a ratio to GDP, if the economy stagnates a state cannot grow itself out of a pool of debt, which already stood at 120 per cent of GDP in 1995. In this context, policy deficiencies, including vis-à-vis corruption and organised crime, should not be neglected. But Italy has never been a haven of political stability—the current government is the 66th(!) since the war—and mafia and corruption have long been embedded. Yet this did not hinder the Italian economy from developing quite dynamically at times.

Italy overtook the United Kingdom in 1969 and France in 1979 in per capita purchasing power. In 2000, Italy’s average standard of living was virtually equal to that of Germany (98.6 per cent of its GDP per head). But after the introduction of the euro in 1999, the country fell behind the UK (in 2002) and France (in 2005) once more. By 2019, Italian per capita income was more than 20 per cent below that of Germany.

In the case of Italy, introduction of the euro and the stagnation in economic activity go hand in hand. One possible explanation is that the value of the euro reflects the average strength of all eurozone economies. The common currency is too cheap for Germany (which boosts German exports) and too expensive for Italy.

Whether Italy can ever regain economic momentum within the eurozone will to a large extent depend on the willingness of Germany and ‘frugal’ countries such as Austria and the Netherlands to reform the euro architecture—especially where European fiscal rules are concerned. In any case, countries such as Austria, the Netherlands or Germany, which have benefited greatly from the ‘cheap’ common currency, should do everything possible to keep Italy in the euro, in their own interest: any return to an ‘expensive’ currency, such as the D-Mark or the Schilling, would be a major burden for the industrial sectors in these strongly export-oriented countries.


We need your support


Social Europe is an independent publisher and we believe in freely available content. For this model to be sustainable, however, we depend on the solidarity of our readers. Become a Social Europe member for less than 5 Euro per month and help us produce more articles, podcasts and videos. Thank you very much for your support!

Become a Social Europe Member

Italian economy
Source: AMECO (Spring 2020); own calculations

5. Italy has carried out many market-liberal reforms

In 2015, the OECD assessed Italy’s ‘reform efforts’ as significantly stronger than those of Germany and France. The Dutch economist Servaas Storm takes a similar line. In an in-depth study he finds that Italy has adhered much more closely to the EU’s policy rulebook than Germany or France. We have already established that the Italian state has recorded greater fiscal-consolidation efforts than all other European partners—at a high price. Fiscal austerity has put pressure on domestic demand and, as a consequence, economic growth.

In the face of austerity, debt has remained high—what John Maynard Keynes called the ‘paradox of thrift’. As the German economist Achim Truger and his colleagues have shown, Italy’s austerity policy led to a dismantling of the healthcare system, which has proved fatal during the Covid-19 crisis. Moreover, drastic reductions in public investment have triggered a slowdown in Italy’s productivity growth.

But not only in the area of public finances has Italy been keen to comply with EU requirements. In 2014, Matteo Renzi’s government reduced workers’ protection against dismissal, extending labour-market deregulation which began in the 1990s. According to Storm, making the labour market more ‘flexible’—also in line with European requirements—led to a sharp increase in fixed-term contracts, pushed back the trade unions and contributed to a decline in real wages, compared with Germany and France.

‘Structural reforms’ from the market-liberal playbook not only reduced inflation in the 1990s. They may also have contributed to reducing unemployment, as the rate in Italy was lower than in Germany and France when the financial crisis hit in 2008. But cheap labour also diminished incentives for Italian companies to make labour-saving investments, key to the productivity improvements which are the basis for long-term growth and rising incomes. Both austerity and market-liberal reforms have inhibited Italy’s productivity growth and, on balance, may have brought more macroeconomic damage than benefits.

6. Italy is the second most important industrial country in the EU

It may sound surprising to northern-European ears but, despite weak productivity growth and problems with price competitiveness within the eurozone, Italy has important economic strengths. It is still the second most important EU location, behind Germany, for industrial production, mainly due to the economic structures in the northern regions. And it ranks third in exports of goods, just behind France, leading on mechanical engineering, vehicle construction and pharmaceutical products. This order is almost identical to Germany’s export structure, and the OECD classifies the industries concerned as ‘medium-high-tech’ to ‘high-tech’.

The historically grown industrial structure of (northern) Italy is only one example of the country’s great economic potential. If austerity and market-liberal reforms have not improved its outlook, a more promising way forward is to try an investment strategy, as the European Commission proposes, and to give Italy’s industry a boost by launching a modern European industrial strategy.

Italian economy
Source: Eurostat
Italian economy
Source: AMECO (spring 2020), own calculations

7. Italians are not richer than Germans or Austrians

Finally, one often hears the argument that Italians are wealthier than, for instance, Germans or Austrians and should therefore pay for their investments themselves. The median Italian household, that located exactly between the richer upper half and the poorer lower half of the population, is indeed wealthier than the corresponding German or Austrian household. But the average Italian household—obtained by dividing the total net wealth by the total number of households—is clearly less wealthy than in Germany or Austria.

Although private wealth is lower in Italy, wealth distribution is more equal; in Germany and Austria, wealth is more heavily concentrated in richer households. One of the main reasons for this is that private-property ownership plays a greater role in Italy. This has a lot to do with the relative underdevelopment of the public safety net: social and co-operative housing, which provides many people in Germany and especially in Austria with affordable housing of a reasonable size, is rare. Social housing and co-operatives do not however count as private assets, even if people there live occasionally more comfortably than in Italian condominiums of poor standard. But it remains simply wrong to say that Italians are wealthier than Germans or Austrians.

Italian economy
Source: ECB

Misrepresentations accepted

The images we have in mind when we think about the Italian economy are often not accurate. The German chancellor, Angela Merkel, and her then finance minister, Wolfgang Schäuble, gave free rein to these clichés a decade ago. At the time, the ingroup of German economists also largely accepted misrepresentations about southern Europe, to avoid considering a departure from the predominant mix of economic policies in the EU—a focus on fiscal consolidation and labour-market deregulation.

Several years later, the same economists and the same chancellor can see the results of these policies were counterproductive. The situation has become so acute that the issue of rebuilding the European economy after Covid-19 has the potential to tear the EU apart.

Now Germany—distancing itself from its ‘frugal four’ northern-European neighbours—wants to push for more investment in southern eurozone countries via the proposed recovery fund. But it will cost Merkel and German economists a lot of energy to convince the population of (northern) Europe—because of those false images of Italy and the south, tactically deployed over the course of so many years.

Philipp Heimberger and Nikolaus Krowall

Philipp Heimberger is an economist at the Vienna Institute for International Economic Studies (wiiw) and at the Institute for Comprehensive Analysis of the Economy (Johannes Kepler University Linz). Nikolaus Kowall holds an endowed professorship in international macroeconomics at the University of Applied Sciences for Economics, Management and Finance, Vienna.

You are here: Home / Economy / Seven ‘surprising’ facts about the Italian economy

Most Popular Posts

Visentini,ITUC,Qatar,Fight Impunity,50,000 Visentini, ‘Fight Impunity’, the ITUC and QatarFrank Hoffer
Russian soldiers' mothers,war,Ukraine The Ukraine war and Russian soldiers’ mothersJennifer Mathers and Natasha Danilova
IGU,documents,International Gas Union,lobby,lobbying,sustainable finance taxonomy,green gas,EU,COP ‘Gaslighting’ Europe on fossil fuelsFaye Holder
Schengen,Fortress Europe,Romania,Bulgaria Romania and Bulgaria stuck in EU’s second tierMagdalena Ulceluse
income inequality,inequality,Gini,1 per cent,elephant chart,elephant Global income inequality: time to revise the elephantBranko Milanovic

Most Recent Posts

transition,deindustrialisation,degradation,environment Europe’s industry and the ecological transitionCharlotte Bez and Lorenzo Feltrin
central and eastern Europe,unions,recognition Social dialogue in central and eastern EuropeMartin Myant
women soldiers,Ukraine Ukraine war: attitudes changing to women soldiersJennifer Mathers and Anna Kvit
military secrets,World Trade Organization,WTO,NATO,intellectual-property rights Military secrets and the World Trade OrganizationUgo Pagano
energy transition,Europe,wind and solar Europe’s energy transition starts to speed upDave Jones

Other Social Europe Publications

front cover scaled Towards a social-democratic century?
Cover e1655225066994 National recovery and resilience plans
Untitled design The transatlantic relationship
Women Corona e1631700896969 500 Women and the coronavirus crisis
sere12 1 RE No. 12: Why No Economic Democracy in Sweden?

Eurofound advertisement

Eurofound webinar: Making telework work for everyone

Since 2020 more European workers and managers have enjoyed greater flexibility and autonomy in work and are reporting their preference for hybrid working. Also driven by technological developments and structural changes in employment, organisations are now integrating telework more permanently into their workplace.

To reflect on these shifts, on 6 December Eurofound researchers Oscar Vargas and John Hurley explored the challenges and opportunities of the surge in telework, as well as the overall growth of telework and teleworkable jobs in the EU and what this means for workers, managers, companies and policymakers.


WATCH THE WEBINAR HERE

Foundation for European Progressive Studies Advertisement

Discover the new FEPS Progressive Yearbook and what 2023 has in store for us!

The Progressive Yearbook focuses on transversal European issues that have left a mark on 2022, delivering insightful future-oriented analysis for the new year. It counts on renowned authors' contributions, including academics, politicians and analysts. This fourth edition is published in a time of war and, therefore, it mostly looks at the conflict itself, the actors involved and the implications for Europe.


DOWNLOAD HERE

Hans Böckler Stiftung Advertisement

The macroeconomic effects of re-applying the EU fiscal rules

Against the background of the European Commission's reform plans for the Stability and Growth Pact (SGP), this policy brief uses the macroeconometric multi-country model NiGEM to simulate the macroeconomic implications of the most relevant reform options from 2024 onwards. Next to a return to the existing and unreformed rules, the most prominent options include an expenditure rule linked to a debt anchor.

Our results for the euro area and its four biggest economies—France, Italy, Germany and Spain—indicate that returning to the rules of the SGP would lead to severe cuts in public spending, particularly if the SGP rules were interpreted as in the past. A more flexible interpretation would only somewhat ease the fiscal-adjustment burden. An expenditure rule along the lines of the European Fiscal Board would, however, not necessarily alleviate that burden in and of itself.

Our simulations show great care must be taken to specify the expenditure rule, such that fiscal consolidation is achieved in a growth-friendly way. Raising the debt ceiling to 90 per cent of gross domestic product and applying less demanding fiscal adjustments, as proposed by the IMK, would go a long way.


DOWNLOAD HERE

ILO advertisement

Global Wage Report 2022-23: The impact of inflation and COVID-19 on wages and purchasing power

The International Labour Organization's Global Wage Report is a key reference on wages and wage inequality for the academic community and policy-makers around the world.

This eighth edition of the report, The Impact of inflation and COVID-19 on wages and purchasing power, examines the evolution of real wages, giving a unique picture of wage trends globally and by region. The report includes evidence on how wages have evolved through the COVID-19 crisis as well as how the current inflationary context is biting into real wage growth in most regions of the world. The report shows that for the first time in the 21st century real wage growth has fallen to negative values while, at the same time, the gap between real productivity growth and real wage growth continues to widen.

The report analysis the evolution of the real total wage bill from 2019 to 2022 to show how its different components—employment, nominal wages and inflation—have changed during the COVID-19 crisis and, more recently, during the cost-of-living crisis. The decomposition of the total wage bill, and its evolution, is shown for all wage employees and distinguishes between women and men. The report also looks at changes in wage inequality and the gender pay gap to reveal how COVID-19 may have contributed to increasing income inequality in different regions of the world. Together, the empirical evidence in the report becomes the backbone of a policy discussion that could play a key role in a human-centred recovery from the different ongoing crises.


DOWNLOAD HERE

ETUI advertisement

Social policy in the European Union: state of play 2022

Since 2000, the annual Bilan social volume has been analysing the state of play of social policy in the European Union during the preceding year, the better to forecast developments in the new one. Co-produced by the European Social Observatory (OSE) and the European Trade Union Institute (ETUI), the new edition is no exception. In the context of multiple crises, the authors find that social policies gained in ambition in 2022. At the same time, the new EU economic framework, expected for 2023, should be made compatible with achieving the EU’s social and ‘green’ objectives. Finally, they raise the question whether the EU Social Imbalances Procedure and Open Strategic Autonomy paradigm could provide windows of opportunity to sustain the EU’s social ambition in the long run.


DOWNLOAD HERE

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us

RSS Feed

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube