Bidenomics in Italy | Financial Times


Italian economy updates

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The European economy is doing well: second-quarter growth data came in strong in virtually every EU country and real-time indicators suggest that high Covid-19 vaccination rates make the recovery sustainable.

That is good news but, in a sense, no surprise. At this stage of the pandemic, growth is determined by the big-picture dynamics of macroeconomic shocks and fiscal and monetary policy stimulus. After the sharp downturn, a strong rebound was to be expected. What happens next will depend much more on the quality of detailed economic policies, and above all on the national “recovery and resilience plans” countries have put in place, financed by unprecedented collective EU borrowing.

Judging these plans is, however, extremely hard, for a number of reasons. One is that it’s early days: not all are even approved yet. Another is that they are far too long, detailed and technical for anyone to voluntarily want to read one, let alone 27, in their entirety. Pity the finance ministry officials who had to write them, the Eurocrats who had to vet them and the financial analysts who are paid to read them so their clients do not have to.

For all that, it is striking that the plans have so far been largely well-received by independent observers. One reason — and this is a credit to the European Commission, which demanded adherence to its own priorities — is that they are investment-heavy in just the right areas, such as physical and digital infrastructure needed by connected, decarbonising economies. Another is that they come with defined goals that must be reached for the “free” money to materialise. A third is that the conditions include long-recommended structural reforms that the commission can now wave a big carrot to encourage.

One national recovery and resilience plan is by far the most important, and that is Italy’s. Whether Italy can use the post-pandemic recovery to exit its 20-year stagnation for good is the pivotal question for the future of Europe. It will determine whether the single market can be seen to work for all parts of Europe. It will shape attitudes to the euro if or when the existential doubts about the single currency, temporarily dispelled, return.

Most important of all, what Italy makes of the European recovery funds is central to whether they will be judged a success, and therefore to the prospect of a permanently enhanced role for EU-wide borrowing and spending.

So it is worth paying some attention to the OECD’s new economic survey of Italy. It gives an overall very optimistic assessment of Italy’s plan. (For those short on time, there is a short blog post.) The promised investments and structural reforms — targeting well-known weaknesses in public administration and competition — could add almost 6 per cent to the economy by 2030.

The sheer amount of prospective investment is important. When the plans were first published, Jack Allen-Reynolds of Capital Economics highlighted that Italy’s recovery and resilience plan is actually bigger as a share of the Italian economy than President Joe Biden’s American Jobs Plan as a share of the US one (both target similar digital and green investments), and would be spent over a slightly shorter period, delivering a bigger fiscal punch.

That is a significant change from business as usual. The OECD points out that the Italian economy invests less than most other member countries. It also shows what is possible when investments happen. While Italian productivity growth has long been among the lowest among its peers, its manufacturing productivity growth actually caught up with the OECD average in the years before the pandemic — and manufacturing was one sector where investment held up, especially in intellectual property. In services, however, investment was falling and productivity growth dismal.

Column chart of Gross value added per person employed, average annual growth rate 2012-19 showing Diamonds in the rough

As the OECD reports, Italy’s economic shortcomings are well-known and, in a sense, straightforward to improve (and have nothing to do with the euro): poor bureaucracy, insolvency resolution and judicial procedures; lack of investment; an undereducated workforce; insufficient digitalisation; poor capital allocation by banks; and a high labour tax wedge. These can all be fixed — the technical policy challenges are perfectly surmountable. Fix them, and the economic rewards should be large. What has always got in the way is the politics. But Italy now has a government that knows what needs to be done, seems determined to do it, has ample financial resources to smooth the reform path and, in Mario Draghi, has a prime minister enjoying enormous support.

What all this means is that an Italian growth miracle is there for the taking, and that Italy has its best chance ever of achieving it. A chance is no guarantee, of course, and the opportunity will not last for very long. Grasp it, and Italy could make up for much of the past two decades of stagnation. Miss it, and it may turn out it was the last opportunity to shake off permanent decline. For both Italy and Europe, the stakes could not be higher.

Other readables

  • University College London’s Henrietta Moore reports on a “local prosperity index” developed in the post-Olympic east London boroughs, to find what “building back better” really means. “To heal their divided nations, [Joe Biden and Boris Johnson] need to replace their economies of inequality with one of belonging.”

  • Look to Canada to learn how to save climate politics from the culture wars, I argue in my column on carbon tax and dividend policies.

  • The New Economics Foundation proposes that the UK can use its existing state-owned financial institutions to fund the infrastructure investments needed to achieve net zero carbon emissions.

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