Briefing Paper

Paola Subacchi and Davide Tentori
Breaking the Vicious Circle: Restoring Economic Growth and Flexibility in Italy
  • As Europe slowly emerges from its economic crisis, Italy remains in recessionary mode. This poses a problem for EMU as a whole, given that Italy is its third largest economy and has the largest public debt.
  • The current malaise of the Italian economy is a story of high economic potential that has been wasted. Over the last decade its performance has trailed behind that of France and Germany.
  • Italy is trapped in a vicious circle that links sluggish growth with high public debt, fiscal tightness and difficult credit conditions. The crisis is therefore not only a matter of public finances; it has spilled from the macro level to the micro level, affecting firms and households.
  • Exports are one of the main drivers of Italy's growth, but relatively low labour productivity and structural problems, such as a disproportionate number of small firms and a low level of R&D activities and investment, are affecting competitiveness.
  • The government urgently needs to devise and implement policies to restore competitiveness and growth. Structural reforms should be supported by short-term measures aimed at boosting growth, creating new jobs and increasing credit provision.