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Two Charts that Show the Challenge Facing Italy’s New Prime Minister

Matteo Renzi is poised to take over as Italy’s youngest-ever prime minister. He has a clear mandate to get the Italian economy back on track, but everyone, including Renzi himself, knows that he faces a daunting task. Here are two charts that show just how far Italy’s growth and living standards have slipped and how hard it will be to reverse the trends.

In terms of growth of real GDP, Italy has been at the bottom among the advanced economies of the OECD for a decade. In the following chart, Italy stands out not for having the slowest-growth in each given year, but rather, for the consistency of its slow growth. Before the global crisis, there were years when Japan or Germany grew more slowly than Italy, but both of those have recovered more strongly. After the crisis, Greece has grown even more slowly, and Spain almost as slowly, but both of those were coming off strong-pre-recession booms. Among OECD countries, only Portugal (not included in the chart) equaled Italy’s average growth rate since 2000 of just 0.3 percent.

But, you might say, isn’t Italy wealthy enough to coast for a while and still maintain a high standard of living? That is true, to a degree. As the next chart shows, as recently as 2001, Italians had a per capita income, measured in terms of purchasing power, that was 119 percent of the EU average. That was higher than Germany or France. The problem is, since that time, Italy’s standard of living has slipped more than any other country. It was already slipping in the early 2000s, when Greece, Spain, and the UK were going strong. Those countries have faltered since, but over the whole period, Italy has lost more ground relative to its peers than any other EU member.

Will Renzi be able to do anything to reverse the slide? Let’s hope so. As he takes office, the latest data show Italy’s economy growing by a tiny 0.1 percent in the fourth quarter of 2013, technically ending the country’s latest recession. His advisers are vetting all manner of reform proposals, ranging from easing the tax burden to freeing up a sclerotic labor market, to changes in the management of state corporations. The new prime minister has also proposed a bold electoral reform that he hopes will create the political space needed to put some of those reforms into effect without watering them down in endless negotiations with coalition partners.

Matteo, we all wish you the best of luck!

One Response to “Two Charts that Show the Challenge Facing Italy’s New Prime Minister”

MaxclapsFebruary 18th, 2014 at 6:10 pm

Dear Prof. Dolan,
there are three major factors that are a massive drag for the Italian economy. Let me put it simply with some figures.
– The estimated, annual tax evasion is 180 bn euros
– The estimated (by the National Audit Office) corruption in government and public corporations is 60 bn euros
– The estimated turnover of organized crime is 138 bn euros (and the net margin 105 bn euros)
Those three things have a massive impact on an annual GDP that for 2013 was a little less than 1,600 bn euros.

Unless the government can counter those (I am not saying eliminate, just reduce them a bit), any supply side reform of the labor market, the tax code, the government bureaucracy, or aimed to improve the relationship between academia and industry to stimulate innovation, or demand side effort to spur internal consumption, will fall short.