28 October 2015

Bruegel: Could Europe’s next growth locomotive be Made in Italy?

Important reforms put in place over the past months, combined with a conjunction of particularly supportive external factors, mean that Italy could indeed become the fastest growing large economy in the euro area in a not-too-distant future.

[...] However, one and a half years down the road, the Prime Minister’s optimistic view for Italy starts no longer looking like a completely far-fetched scenario, but rather as a possibility. Important reforms put in place over the past months, combined with a conjunction of particularly supportive external factors, mean that Italy could indeed become the fastest growing large economy in the euro area in a not-too-distant future. [...]

Notwithstanding a wafer-thin majority in Parliament, Renzi has managed to secure approval for reforms that have the potential to restructure deeply the Italian economy.

A substantial liberalisation of the labour market – embodied in the so-called ‘Jobs Act’ – could boost Italy’s appallingly low employment rate by as much as 10 percentage points over the long term according to a survey of business leaders attending the Forum Ambrosetti, and reverse the decline in labour productivity observed during the 2000s. [...]

With a final vote in the Senate in early August, foundations have been laid for a deep reorganisation of the public administration. Designed to simplify the byzantine bureaucratic apparatus that has long choked the Italian economy, the PA reform is also set to promote transparency and clearer lines of accountability. Past success stories show how these are precisely the set of principles behind an effective anti-corruption strategy, in a country where the problem has become disconcertingly rampant.

The latest major addition to Renzi’s reform checklist is an agreement on overhauling the Italian institutional set-up that, in the Prime Minister’s plans, will transform the Senate in a regional chamber with little say on national legislative matters. Combined with the electoral reform – the so called Italicum – approved in May, the constitutional reform has the potential to ensure political stability to a country where the average lifetime of a government in the post-War era has been 12 months.

Tables have turned in favour of Renzi’s prophecy also due to a set of particularly favourable external conditions. The ECB’s QE programme has proved more successful in Italy than elsewhere in rekindling bank-lending channels, while a combination of low oil prices and a weak euro have bolstered the country’s domestic and foreign demand. Finally, the compression of sovereign bond yields resulting from the ECB’s actions have granted Italy more fiscal leeway: a lever that the Renzi government seems set to use to the fullest extent. [...]

Full article in Bruegel

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