Social Europe

  • EU Forward Project
  • YouTube
  • Podcast
  • Books
  • Newsletter
  • Membership

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.

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.



Don't miss out on cutting-edge thinking.


Join tens of thousands of informed readers and stay ahead with our insightful content. It's free.



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.

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.

Harvard University Press Advertisement

Social Europe Ad - Promoting European social policies

We need your help.

Support Social Europe for less than €5 per month and help keep our content freely accessible to everyone. Your support empowers independent publishing and drives the conversations that matter. Thank you very much!

Social Europe Membership

Click here to become a member

Most Recent Articles

u4219834c92bed 3 AI’s Impact on Europe’s Job Market: A Call for a Social CompactFederico Pozzi, Pietro Valetto and Elizabeth Kuiper
u421983d2 3 The EU’s Landmark Mercosur Deal Promises Much But Delivers LittleSimela Papatheophilou, Werner Raza and Bernhard Tröster
u4219834af 1 Will Denmark Lead Europe Towards a Super-Rich Tax?Isabelle Brachet
611e8de7e149c8763c9d58fc537549c18d20044a0abfeadd41919a1a731b6e64 Britain Rediscovers Europe as Macron and Merz Lead a Democratic ReawakeningPolly Toynbee

Most Popular Articles

u4219834676 bcba 6b2b3e733ce2 1 The End of an Era: What’s Next After Globalisation?Apostolos Thomadakis
u4219834675 4ff1 998a 404323c89144 1 Why Progressive Governments Keep Failing — And How to Finally Win Back VotersMariana Mazzucato
09d21a9 The Future of Social Democracy: How the German SPD can Win AgainHenning Meyer
u421983462 041df6feef0a 3 Universities Under Siege: A Global Reckoning for Higher EducationManuel Muñiz

Hans Böckler Stiftung Advertisement

WSI Report

WSI Minimum Wage Report 2025

The trend towards significant nominal minimum wage increases is continuing this year. In view of falling inflation rates, this translates into a sizeable increase in purchasing power for minimum wage earners in most European countries. The background to this is the implementation of the European Minimum Wage Directive, which has led to a reorientation of minimum wage policy in many countries and is thus boosting the dynamics of minimum wages. Most EU countries are now following the reference values for adequate minimum wages enshrined in the directive, which are 60% of the median wage or 50 % of the average wage. However, for Germany, a structural increase is still necessary to make progress towards an adequate minimum wage.

DOWNLOAD HERE

S&D Group in the European Parliament advertisement

Cohesion Policy

S&D Position Paper on Cohesion Policy post-2027: a resilient future for European territorial equity

Cohesion Policy aims to promote harmonious development and reduce economic, social and territorial disparities between the regions of the Union, and the backwardness of the least favoured regions with a particular focus on rural areas, areas affected by industrial transition and regions suffering from severe and permanent natural or demographic handicaps, such as outermost regions, regions with very low population density, islands, cross-border and mountain regions.

READ THE FULL POSITION PAPER HERE

ETUI advertisement

HESA Magazine Cover

With a comprehensive set of relevant indicators, presented in 85 graphs and tables, the 2025 Benchmarking Working Europe report examines how EU policies can reconcile economic, social and environmental goals to ensure long-term competitiveness. Considered a key reference, this publication is an invaluable resource for supporting European social dialogue.

DOWNLOAD HERE

Eurofound advertisement

Ageing workforce
The evolution of working conditions in Europe

This episode of Eurofound Talks examines the evolving landscape of European working conditions, situated at the nexus of profound technological transformation.

Mary McCaughey speaks with Barbara Gerstenberger, Eurofound's Head of Unit for Working Life, who leverages insights from the 35-year history of the European Working Conditions Survey (EWCS).

Listen to the episode for free. Also make sure to subscribe to Eurofound Talks so you don’t miss an episode!

LISTEN NOW

Foundation for European Progressive Studies Advertisement

Spring Issues

The Summer issue of The Progressive Post is out!


It is time to take action and to forge a path towards a Socialist renewal.


European Socialists struggle to balance their responsibilities with the need to take bold positions and actions in the face of many major crises, while far-right political parties are increasingly gaining ground. Against this background, we offer European progressive forces food for thought on projecting themselves into the future.


Among this issue’s highlights, we discuss the transformative power of European Social Democracy, examine the far right’s efforts to redesign education systems to serve its own political agenda and highlight the growing threat of anti-gender movements to LGBTIQ+ rights – among other pressing topics.

READ THE MAGAZINE

Social Europe

Our Mission

Team

Article Submission

Advertisements

Membership

Social Europe Archives

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Miscellaneous

RSS Feed

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

BlueskyXWhatsApp