Coming from the far-right political party Fratelli d’ItaliaGiogia Meloni won the legislative elections with a coalition ranging from the league from Matteo Salvini to Forza Italia by Silvio Berlusconi. His impressive score gave him a stepping stone to the position of Chairman of the Board. But uncertainties surrounding the new government’s objectives have made financial markets extremely nervous, to the point of seeing Italy’s sovereign interest rates soar in recent weeks.
Under these conditions, it is not surprising that Giorgia Meloni’s first speech consisted in recalling Italy’s unfailing anchorage to the EU, this ” common house to face the challenges that the Member States can hardly face alone“. At most, she allowed herself to specify that although Italy naturally respects the acquis communautaire, her country wanted to be an agent of change, in particular with regard to the European rules that her government considers dysfunctional. And to put words into action, her first official outing outside Italy will take her to meet the leaders of the European institutions in Brussels on 3 November.
Be that as it may, the recent upheavals in the financial markets should not overshadow Italy’s many structural economic problems.
Recession in sight
The post-Covid 19 growth prospects in Italy were reassuring at first sight: +3.3% in 2022. Unfortunately, the high inflation in the country, which reached nearly 12% at an annualized rate in October , due to its heavy dependence on Russian gas (about 25%, despite the efforts undertaken by the previous government of Mario Draghi), and the deterioration of global economic conditions led the Bank of Italy to revise its forecast sharply downwards growth for 2023: only 0.3%! The IMF, even more pessimistic, anticipates an inevitable recession. It is that the increase in post-Covid activity was a form of trompe-l’oeil linked to the return of tourists and the resumption of consumption, after the health restrictions. Over a longer period, Italy has still not succeeded in returning to its growth levels before the European crisis and before the globalsubprime .
The struggling industry
Admittedly, the Italian economy is not limited to its tourism and it is also necessary to count on its industry,
located more at the top of the range (pharmaceuticals, furniture, industrial capital goods, etc.). Unfortunately, it is clear that many parts of its industry are finding it increasingly difficult to maintain their share in foreign markets. As for per capita productivity, it has been structurally in decline for almost 15 years and the investments that would have made it possible to reverse the trend have remained too low.
If we add demographic aging to this, as well as the poor performance of the education and training system, we can better understand why “potential growth” is at half mast, the latter being defined as growth achieving the maximum level of production without accelerating inflation, given the available production capacities and labor. And what about the fragility of the banking sector and territorial inequalities (particularly North-South) which further undermine the country’s productive potential? However, low potential growth weighs heavily on public finances.
Public finances under pressure
The activity rate, which corresponds to the number of workers in relation to the entire population of working age, remains at a much lower level in Italy compared to other European economies. In addition to its consequences on growth, this leads to lower fiscal resources for the State and, consequently, to more frequent recourse to public debt, which now reaches 150% of GDP. The rise in interest rates on 10-year government bonds, from 1.3% in January to 4.8% in mid-October, was in danger of becoming unsustainable very quickly to repay interest on the debt and finance a deficit. 7.2% of GDP in 2021.
This is why, while Giogia Meloni campaigned on the idea of renegotiating the National Recovery and Resilience Plan (PNRR) from European funds, she seems to have watered down her Chianti.Obviously, the European Commission has the means to hold the new government in check, Italy being one of the main recipients of this European post-Covid-19 recovery plan. Moreover, 20 billion euros remain to be obtained by the end of the year, on the express condition that economic reforms are implemented by the Italian government.
However, if the first announcements seem to have temporarily eased the pressure on the financial markets, it is not certain that the current context is conducive to major changes…
Italy: the sick man of the European Union (EU) | The Normandy Gazette