2023-06-21 03:10:00
Despite a difficult global economy, the Italian economy is doing relatively well. After slowing down in the last quarter of 2022, GDP growth accelerated in the first quarter of this year to a rate of 1,9 % on an annual basis. However, even if growth were to pick up slightly, we are unlikely to see a repeat of last year’s overall performance, when the economy grew 3,7 % – one of the highest growth rates in the last 40 years.
Last year’s growth was largely the result of robust domestic demand, particularly private consumption and investment in residential real estate, which benefited from tax credits introduced before the pandemic to make Italy’s aging housing stock more energy efficient. At the same time, the fiscal measures helped households and businesses preserve their purchasing power in the face of rising food and energy prices following Russia’s invasion of Ukraine.
But the expansionary fiscal policy widened the budget deficit to the impressive figure of 8% of your GDPeven as strong growth brought the public debt-to-GDP ratio down to 144%, down 11 points from the peak reached in 2020. Now that many tax measures have been removed, the projected deficit has fallen to 4.5% of GDP.
Lhe problem is that growth will also be weaker this year. Worse, the interest rate hikes of the European Central Bank have increased borrowing costs, dampening private investment and increasing the debt service cost. As a result, this year’s GDP growth rate is expected to be around 1,1 to 1.2%, before slowing further in 2024. This would be a reversion to the mean. Since 1983, the Italian economy has grown at an average annual rate of 1,1 %compared to 2.4% for the EU as a whole and 2.2% for the G7.
This outlook does not bode well for Prime Minister Giorgia Meloni, who campaigned last year promising to “raise” the Italian economy. It needs strong growth to carry out its economic program, in particular its wish toextend the flat tax high-income self-employed workers. But it must also generate a primary budget surplus. With rising interest rates, the risk that investors will lose confidence in Italy’s ability to service its debt increases. Mr Meloni must therefore keep the spread between Italian and German 10-year bonds as low as possible, ideally within a range of 100 to 150 basis points. It is currently around 165 basis points.
To achieve sustained growth, Meloni’s government must tackle long-standing structural issues, such as regional development divergencesthe aging population, the low female participation rate to the labor market, the weak productivity growthincome stagnation,tax evasion and new climate-related risks. These problems are not new in Italy. During his first election campaign in 1994, former Prime Minister Silvio Berlusconi, deceased on June 12, had promis revive the economy and create a million jobs, which does not occur. Berlusconi’s three governments have never been characterized by sound economic policies.
Fortunately for Meloni, in responding to these challenges, Italy should have €191.5 billion (205 billion dollars) additional from the stimulus fund of the European Union as a result of the pandemic, with a total value of 800 billion euros. As part of his national recovery and resilience plan (PNRR), Italy is committing funds to overcome many structural barriers to productivity, with a focus on digitalization and innovation, the transition to clean energy and social inclusion.
The PNRR certainly has the potential to kick the Italian economy into high gear. With the aim of reducing the gaps between regions, generations and genders, it allocates 82 billion euros to southern regions from Italy, with investments in 500 projects, ranging from the deployment of electric buses to the construction of high-speed rail links. Some 72 of these projects are intended for small localities and will be managed by local authorities.
But will these projects be completed on time and on budget? The Italian Court of Auditors, an independent body, has recently notified that the PNRR was already behind schedule. In fact, the ambition of the PNRR is compromised by structural incapacities that date back many years. All funds must be spent by 2026, but the country simply does not have the capacity to implement so many infrastructure projects in such a short time. The problem is particularly pronounced at the local level, due to a combination of scarce skills and past reductions in public sector staff.
However, if the objectives of the PNRR are not achieved, the funds allocated will not be fully disbursed and the overall investments will therefore be reduced. Although the European Commission approved Italy’s second tranche (€21 billion) last September, the government’s request for the third tranche (€19 billion) has been pending since January.
The stakes are high. Italy has the opportunity, once in a generation, to modernize. The best way forward is perhaps to balance certain individual expenses once morest the overall objective of the PNRR. While localized projects naturally respond better to local concerns, they do not necessarily align with the larger goal of boosting productivity.
Streamlining the PNRR and getting the green light from the EU requires increased collaboration between the government and the opposition. Italy still has a chance to transform its economy and achieve sustained growth. But whether this is politically feasible remains to be seen.
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