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ROME (Reuters) – The risk to Italy’s growth from the COVID-19 pandemic is growing faster than expected as structural weaknesses resurface, raising the risk of a fragile economy for the euro zone’s third-largest economy.
After gross domestic product unexpectedly stabilized in the third quarter, the country’s statistics office ISTAT said this month it expects 2024 to remain flat at just 0.5%, half of the government’s target of 1%.
The ISTAT estimate would restore Italy to its traditional position among the weakest players in the euro zone and contradict the optimistic picture painted by Prime Minister Giorgia Meloni, as well as economists, a few months ago.
The latest information has been alarming. Business confidence is at its lowest level since 2021, the economic crisis has worsened, and the labor sector that has fueled the economy for years is now contracting.
“Italian businesses made up of small companies are no longer helping to grow, they don’t have enough capital and are fighting the green revolution instead of embracing it as an opportunity for growth,” said Francesco Saraceno, professor of economics at Paris Science Po and Rome. LUISS University.
Analysts say the situation is particularly worrying given that Italy is receiving billions in aid from Brussels as part of the European Union’s post-COVID Recovery Fund.
Spain, another recipient of the fund, is growing four times faster.
PERMANENT STRENGTH
Saraceno said Italy’s increase in 2021-2022 was mainly due to the government’s incentives for the construction sector – the so-called “superbonus” – which led to an increase in income that has changed this year when the high-cost system was abolished.
Italy has been lagging behind the euro economy since it adopted the single currency 25 years ago, and its latest slowdown threatens to devastate its already battered public finances from a huge bonus.
Public debt, which is the second highest in the euro zone, is expected to rise to 138% of GDP in 2026 from 135% last year.
If the growth in 2025 will reach far below Rome’s 1.2%, as many forecasters expect, the debt ratio could rise rapidly. Investors may be more reluctant to buy Italian bonds, which is increasing the level of public debt.
Italy is already under EU rules to reduce its budget deficit due to high inflation in the past two years, eliminating any hope of using its own strategy to grow.
THE POWERS OF SPAIN NOW
The country’s weakness is in stark contrast to Spain, whose GDP is expected to grow by around 3% this year. In the last year Spain has grown at rates between 0.7% and 0.9%, while Italy has grown between zero and 0.3%.
Angel Talavera, head of European research at Oxford Economics, said Spain’s success in attracting migrants and integrating its economy had contributed significantly to its growth, along with a sharp rise in tourism and consumer spending.
Very few immigrants to Italy do not work in the arts or crafts, and they are mostly economic.
Meanwhile, young Italians are leaving the country by the thousands due to lack of job prospects. The
Population decline in and of itself weakens the economy.
“With the diversity of the economy, Spain is very dependent on work and tourism, while Italy still has a large share of manufacturing that is increasing and is acting as a way to slow down growth,” Talavera said.
“Over the last 20 years Spain also seems to have done a good job of renovating its infrastructure and public services,” he added.
AND EDUCATION, DOWNLOAD
Economists agree that an incomplete list of Italy’s problems includes underinvestment in education, infrastructure and public services, weak governance, risk-averse banks, an underdeveloped market and an inadequate justice system – all issues that have remained unresolved for years.
There is also surprising agreement on what the main policies should be to regulate the economy, a question Reuters asked five prominent Italian economists.
Roberto Perotti, professor of economics at Milan’s Bocconi University, Lorenzo Bini Smaghi, former member of the European Central Bank board, Andrea Roventini, professor of economics at Pisa’s Sant’Anna University and Science Po’s Saraceno all said that the focus should be on economics in education and research.
Lorenzo Codogno, head of LC Macro (BCBA:) Consultants and the former head of finance at the Italian Treasury, said the most important thing is to free the labor market.
