Italy’s post-pandemic economic recovery is losing momentum faster than anticipated, re-exposing long-standing structural vulnerabilities and raising concerns about the fiscal health of the Eurozone’s third-largest economy. Following unexpected stagnation in the third quarter, the national statistics institute ISTAT projected minimal near-term recovery, forecasting a mere 0.5% growth in 2024, half the government’s 1% target.
Table Content:
This anemic projection places Italy back among the Eurozone’s weakest performers, contrasting sharply with the optimistic outlook presented by Prime Minister Giorgia Meloni and some economists just months ago. Recent economic indicators paint a bleak picture: business confidence has plummeted to its lowest point since 2021, a persistent manufacturing crisis is intensifying, and the service sector, which had previously bolstered the economy, is now contracting.
Structural Weaknesses Hinder Growth
“Italy’s economic model, characterized by small firms, suffers from inadequate public investment and a resistance to embracing the green transition as a growth catalyst,” asserts Francesco Saraceno, economics professor at Sciences Po in Paris and LUISS University in Rome. The situation is particularly alarming given the substantial financial inflows Italy receives from the European Union’s post-COVID Recovery Fund. Spain, another major recipient of the fund, is experiencing significantly stronger growth, at least four times that of Italy.
Saraceno attributes Italy’s 2021-2022 growth spurt primarily to state-sponsored construction incentives, the “superbonus,” which fueled an investment surge now reversing as the costly program winds down. Italy’s chronic economic underperformance within the Eurozone, coupled with this recent downturn, threatens to destabilize its public finances, already strained by the superbonus. Government projections indicate a rise in public debt, the second highest in the Eurozone, to approximately 138% of GDP by 2026 from 135% last year. If 2025 growth significantly underperforms Rome’s 1.2% target, as widely predicted, the debt ratio could escalate further, potentially deterring investor confidence in Italian bonds and increasing the government’s debt servicing burden. Furthermore, EU mandates to reduce Italy’s budget deficit due to substantial overruns in recent years limit the government’s ability to stimulate growth through spending.
Spain’s Success Underscores Italy’s Challenges
Italy’s economic woes stand in stark contrast to Spain’s robust growth, projected at around 3% this year. While Spain has consistently expanded at quarterly rates between 0.7% and 0.9% over the past year, Italy has languished between zero and 0.3%.
Angel Talavera, head of European research at Oxford Economics, highlights Spain’s success in attracting and integrating migrants into its economy, coupled with a tourism boom and strong consumer spending, as key growth drivers. In contrast, Italy’s significantly smaller migrant population often faces limited opportunities in skilled or semi-skilled jobs, frequently relegated to the informal economy. Simultaneously, a brain drain of young Italians seeking better prospects abroad further weakens the economy.
“The two economies differ significantly,” Talavera explains. “Spain relies heavily on services and tourism, while Italy retains a substantial but increasingly uncompetitive manufacturing sector that hinders expansion. Over the past two decades, Spain has also seemingly modernized its infrastructure and public services more effectively.”
Addressing Fundamental Issues: A Call for Investment in Education
Economists largely agree on Italy’s core challenges: underinvestment in education, infrastructure, and public services; stifling bureaucracy; risk-averse banks; an underdeveloped stock market; and an inefficient justice system. These longstanding issues demand urgent attention.
A consensus emerges among leading Italian economists regarding the top policy priority: investment in education and research. Roberto Perotti of Bocconi University, Lorenzo Bini Smaghi, a former European Central Bank board member, Andrea Roventini of Sant’Anna University, and Francesco Saraceno all emphasize this crucial need. Lorenzo Codogno, head of LC Macro Advisors and a former Italian Treasury chief economist, prioritizes further labor market liberalization. Addressing these fundamental weaknesses is paramount for Italy to achieve sustainable economic growth and contribute to Eurozone stability.
