Italy attempted to implement structural reforms under former Prime Minister Matteo Renzi’s government, notably through the 2015 Jobs Act and pension reform. However, these were only partially implemented and are now presently being unwound under the current Five Star-Lega Nord government.
While recent headlines focused on the conflict over the Italian government’s budget target, both internally and with the EU, ultimately it is structural reforms that are required to spur longer-term growth. Italians are poorer since the introduction of the euro, but this is largely due to the lack of reforms. By contrast, the structural reforms enacted in Germany (2005) and Spain (2012) have worked, leading to better economic outcomes (as per first chart above).
Italy’s problem is further compounded by its high levels of debt. Italy’s debt-to-GDP ratio increased sharply during the crisis years (c.2008-2014), but did not decline during the stronger years (c.2014-present) owing to low levels of potential growth. The second chart above demonstrates how quickly the ratio could rise again in a downturn, leading to questions about the sustainability of its debt.
Gareth Colesmith, head of global rates and macro research, Insight Investment.