Comment: If you think Europe is fine, look at Italy
Italy is growing far too slowly and has been doing so for a long time
Customers eat dinner at a restaurant in downtown Rome this week. “The main obstacle to growth in Italy is the government.” Photograph: Reuters
It has become fashionable not to worry about Europe and the euro zone. This complacency has a serious flaw: Italy.
Optimists argue that Europe is on the mend. The central bank is maintaining stimulus, Germany’s export potential remains large, and France will continue to be a haven for investors. Struggling countries such as Greece and Portugal represent less than a tenth of the euro area’s economic output and population.
Enter Italy. It is the third-largest economy in the euro zone, with a population of more than 60 million and gross domestic product of more than €1.5 trillion. The government’s debt burden, at about 1.3 times GDP, is among the largest in the world. (That’s the International Monetary Fund’s estimate of gross debt, which is the most reliable series to use for cross-country comparisons; net debt, which includes some government assets, is projected to be 105.8 per cent of GDP this year.)
Troubling as Italy’s public finances may be, they are not the main reason to be concerned. There is no magic threshold above which government debt will crush the economy, and countries have grown their way out of even larger debt burdens.
The problem is that Italy is growing far too slowly and has been doing so for a long time. During the 1990s, the country’s economy expanded at an average annual inflation-adjusted rate of just 1.2 per cent, compared with the euro area’s 1.8 per cent. From there, it got worse: Italy’s average growth rate since 2000 has been 0.4 per cent, compared with 1.3 per cent for the euro area.
Why such anaemic growth? It’s not for lack of trying. Italy’s investment rate is higher than Germany’s. Infrastructure investment is in line with euro zone averages. Human capital, measured as the level of education, has improved steadily. Labour-market and product-market regulation have converged toward Germany’s levels. Research and development spending, albeit low relative to European Union averages, has improved in recent years.
The main obstacle to growth in Italy is the government itself. As Daniel Gros, a leading European economist, put it in 2011: “The only factors that have deteriorated absolutely and relative to the core of the euro zone are indicators of governance – such as corruption and rule of law.”
On some measures of governance, Italy does worse than even Greece.
Presumably, Italy’s national averages mask important regional differences. If some parts of northern Italy are no different from Germany or Austria in terms of ease of doing business, then the situation in other parts of the country must be really bad. A recent report from the World Bank, for example, found that a municipal building permit takes six months to obtain in Palermo, compared with just one month in Milan.