The Italian Job

Draghi has put the Italian economy back on track, but challenges remain.

Italy has always been known for its rich heritage. From the Roman Empire through the Renaissance to the modern day, Italy has set high standards in the worlds of art, music, architecture, cuisine and fashion. Unfortunately, there are things that Italy is infamous for, like an unstable economy and a dysfunctional political system. In the past decade, Italy was often referred to as the “sick man of Europe.”

Italy’s economic wellness has improved quite a bit since the pandemic first struck, thanks to a rare interval of strong leadership. But new maladies are threatening. How Italy copes with these ailments will set an example for the rest of the continent.

In the two decades before COVID-19, Italy’s economy barely grew. Its unemployment rate reached double digits in 2012 and stayed there for the next seven years. Italians were poorer in 2019 than they had been in 2000. Their government is among the most indebted in Europe.

Some of this woeful experience is the result of political instability. Since the end of World War II, Rome has had 66 governments lasting for an average of just over one year. Bureaucrats often choke business activity: it takes an average of 500 days to resolve a civil legal dispute in Italy, versus about 200 days in Germany. These kinds of structural frictions have severely limited foreign investment in Italy.

The pandemic inflicted further pain, leading to Italy’s worst economic crisis in decades. When Mario Draghi was sworn in as prime minister of Italy in February of last year, his task was clear: provide stability and restore confidence in the Italian economy. And on those fronts, he has made important progress.

Chart: GDP per capita

The Draghi government, an alliance of political forces, has proven more durable than most of its recent predecessors. This stability has allowed Italy to make good progress on reforms. Additional resources for the court system will help clear the backlog of commercial cases, freeing businesses to proceed. Accelerated progress on public works, including the construction of high-speed rail and upgrading the telecoms infrastructure, will enhance efficiency. A renewed focus on preventing fraud and conflicts of interest are likely to boost investor confidence.