Scott Sumner  

Forza Italia!

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The title of this post was the campaign slogan of Silvio Berlusconi. It's often translated as "Let's Go Italy!" Instead, Berlusconi's government presided over unprecedented economic decline, with real GDP per capita now lower than in the year 2000:

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Berlusconi had the right idea---Italy does need a more dynamic economy---he simply failed at executing this policy.

Martin Wolf has a piece in the FT that shows how Italy has done poorer than other Eurozone countries with the exception of Greece:

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Wolf is very pessimistic about Italy's prospects:

Germany's nominal GDP rose by 34 per cent between the first quarter of 2007 and the last quarter of 2017 (a compound average annual rate of 2.7 per cent). Italy's rose by a mere 9 per cent over the same period (a compound average annual rate of 0.8 per cent).

Not surprisingly, given modest overall growth of nominal GDP, even Germany's core annual inflation averaged a little over 1 per cent. Such low inflation in the core creditor country made adjustments in competitiveness within the eurozone far more difficult.

If the Italian government had been able to pursue its traditional policy of devaluation and inflation, it could have generated a far stronger rise in nominal GDP. That would surely also have delivered higher levels of real output. Italy's real GDP in the last quarter of 2017 was, instead, 5 per cent below its level in the first quarter of 2007, while its real GDP per head was still some 9 per cent below the 2007 level a full decade later. No wonder Italians are disillusioned.

No doubt, Italy has huge structural economic problems, which tightly constrain growth, but potential output cannot have fallen this much since 2007. Italy also suffers from chronically deficient demand, a failing that the eurozone, as it is now run, is simply unable to remedy. This is partly because overall demand has been too weak and partly because, within the rules, demand cannot be directed to where it is weakest.

A prolonged recession, with high unemployment and low employment has inescapable political consequences. But the biggest frustration may be that the people Italians vote for have next to no room for manoeuvre.


Wolf has provided a reasonable analysis of the problems facing Italy, but in the end I think it's a mistake to frame things in this way. It diverts attention away from what Italy needs to do.

There's no obvious reason why Italy cannot grow fast. Consider:

1. Italy grew very dramatically between 1950 and 2000.

2. Northern Italy is fairly affluent by European standards.

3. Other countries such as Germany are able to do relatively well, despite using the euro as a currency.

4. Italian Americans have done well, despite the fact that most originally came from southern Italy, the most depressed part of the country

In recent months, I've seen a number of articles describing the plight of center-left parties in Europe. One problem might be their defeatist attitude. Having built the world's most successful welfare states, Europe's center-left doesn't know where to go next. The southern half of Europe is not doing well, and voters can sense when a party is not offering any answers.

It's true that negative demand shocks have adversely affected Italy. But that doesn't explain why GDP has not risen since 2000. Wages are not sticky for 18 years. Italy also faces major supply side ("structural") problems, not just a lack of demand.

I'm under no illusions that it will be easy to reform Italy's economy. There are all sorts of special interest groups that would put up roadblocks. But it's important to be clear as to what the problem is. A bit easier money from the ECB or fiscal transfers from Germany are not going to solve Italy's growth problem. The only solution is supply-side reforms. Italy doesn't need German money; they need German public policies. European voters sense this, which is why they have recently been opting for politicians that make bold promises, not those with a defeatist attitude. It doesn't mean that the politicians making bold promises will actually deliver (as I noted earlier, Berlusconi failed to do so), rather that voters sense that it's their only hope.

Wolf's piece may be more "realistic" than this blog post. But in a technical sense Italy actually does have plenty of "room to manoeuvre". The problems are mostly political. If they fail, it will not be because their situation is hopeless, rather because their leaders treated the situation as hopeless.

PS. I'm certainly no fan of Macron, who has a bit of a Napoleonic complex. But when one considers the current depressing state of European politics, his sort of "can do" center-left message may be the best of a bad lot. Other center-left parties might want to take a few pointers.


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COMMENTS (9 to date)
Pavel writes:

I am no fan of Berlusconi, but he did not preside over all of the period in your graph. He ran Italy 2001-2006 and then 2008-2011. Both of those periods appear to be better than the time in between them (when Romano Prodi ran the country) and right after the latter one (when Mario Monti did the same)

Benoit Essiambre writes:

>Wages are not sticky for 18 years.

Has it been 18 years already since last time their money was too tight?

mike writes:

3. Other countries such as Germany are able to do relatively well, despite using the euro as a currency.

This criticism seems to make no sense... because the argument is that the euro hurts every other country besides germany because they artificially get to keep their exchange rate low compared to if germany had its own and italy had its own. The argument is literally that germany benefits and italy (and greece, spain, portugal etc) lose because they can't depreciate and inflate somewhat.

So it seems like your point 3 is completely backwards. Relatively confident that I am right on this, but curious if you just overlooked what I said or how do you view it differently?

E. Harding writes:

Apparently Italy's problem was non-meritocratic management practices failing to adapt to the Internet age.
https://voxeu.org/article/diagnosing-italian-disease

Noah Carl writes:

"The only solution is supply-side reforms. Italy doesn't need German money; they need German public policies. European voters sense this"

It's hard to see how the Italian voters sense this, when the Five-star movement, a left-populist party, won the recent election

mariorossi writes:

There is no easy solutions to Italy's problems. The economy has been heavily affected by chinese and emerging markets competition. Italy used to produce (and export) relatively low added value goods (textiles, shoes, furniture, etc...). Competition in these sectors is now brutal. A rigid labour market makes it harder to move resources to new sectors. The ECB certainly didn't help, but even with a better monetary policy, it would have been a difficult period for the Italian economy. Between demographic and economic developments, it's not obvious to me that Italian economic potential is really as large as it was 20 yearsd ago.

Berlusconi tried a couple of times to make reforms. But learned quite quickly that there is no electoral benefit in it. He always gave up at the first pushback. Most liberalizations in Italy have been pushed by the center-left governments. Just to make an example, Italy still has professional orders/unions (laywers, engineers, etc...) which mandated (high) minimum pricing. Prodi tried to increase competition in these professional services. After 2008 the center-right parties delayed some of the reforms and they now want to go back to the old system. He also changed the electoral law to a proportional system before the 2006 election to make sure the center left wouldn't have the votes to govern. In that he was certainly successful...

Both right-wing (Lega) and left-wing (M5S) protest parties are in favour of lowering the pension age, reintroduce prohibitions on part-time work and re-impose sunday and lunch-time closures in retail (apparently 2 hour lunch breaks like make Italy great again). That's what voters are supporting nowadays. It's not to different from people voting for Trump and protectionism.

The recent government (which included berlusconi for some time) raised the pension age, it has made it easier to hire (and fire) part time workers, tried to sort out the banking sector. They are certainly not great statist by any measure and they have their share of incompetence and corruption, but they tried to go down the structural reform route. They were obliterated at the polls. Their is no painless way out of the swamp the country is stuck in.

Scott Sumner writes:

Pavel, Actually, Italy did poorly during 2008-11.

Benoit, No, but the evidence is very strong that the problem is a low trend rate of growth, not just a cyclical problem. Think of the other extreme; the fast US recoveries from the 1921 depression, or the 1982 recession.

Mike, I'm not sure I follow, but I'd say this. Germany was hurt by an overvalued real exchange rate in 2004-5, when unemployment was 11%. Instead of being passive, they did aggressive supply side labor market reforms that got their unemployment rate down.

I'm not saying ECB policy was not a problem for Italy, just that it's not anywhere near the only problem. They need German style reforms.

Scott Sumner writes:

Noah, Good point, I misspoke. I meant to say that European voters correctly sense that the standard center left policy proposals are not enough. You are right that European voters often do not seem to know the right solutions.

mariorossi, Good comment. I think Italy has two problems. Why isn't the north doing better? Perhaps Chinese competition is a factor there. The second question is why is the south so much poorer than the north? That's where domestic factors need to be addressed (statism, corruption, etc.)

Alec Fahrin writes:

Here's an extremely simplistic reply that raises more questions than answers.

1. Italy grew dramatically until it joined the Eurozone, but how much of the growth slowdown is attributable to that?

2. Northern Italy has always been more affluent than southern Italy. They have completely different geographies and demographic structures. North Italy also benefits from immigration, while southern Italy suffers from emigration.

3. Sumner, I completely disagree with this logic. The economics I learned state that currency values should naturally represent the value of that currency. The Italian Lira was substantially lower in real value relative to the Deustchmark. Italy's economy has always been less efficient and capable than Germany's, even in the 1990s. Therefore, the euro is likely stronger than optimal for Italy's economy and weaker than optimal (but the absolute difference is less) for Germany's economy. Italy's economy, and export sector, is constrained by a monetary leash. This was especially true 2001-2013 before "whatever it takes".

4. Italian-Americans are barely Italian anymore. Many first and second-generation Italians did poorly in America. That only changes with the Americanized generations who happened to join the "white" portion of the socio-economic totem pole.

5. The effect of Chinese competition is SO overrated. China's exports represent 24% of world exports, and they were 14% in 2000. Yet, if you look at the developing world share, that increased from 28% in 2000 to 50% in 2014. So the majority of the gain came from non-Chinese developing nations.

I see the overall problem of Italy's economy as related to: culture, the eurozone, political mismanagement, and foreign competition in that order.

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