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The Italian Economy and its inefficient public administration


A few days ago, the Italian leading business newspaper, Il Sole 24 Ore, published an article on economic growth in Europe. The article offered several interesting insights. Notably, it emphasized that Italy is expected to outperform many industrialized countries in 2024. In fact, in the first quarter of this year, France and Germany grew by only 0.2%, while the US achieved a 0.4%. Italian GDP growth was 0.3%, a “brilliant” performance, according to the Sole 24 Ore, but far from stellar, if one considers the expected annual growth of major advanced economies in 2024 (see Figure  1).

Figure 1 In fact, the Italian economy is stuttering. And perhaps marginally better than the France, where the rate of unemployment, the absolute size of its public debt, and the percentage of individuals facing material deprivation are higher. Germany, commonly described as the locomotive of Europe, also seems to be mired in difficulties, while the United Kingdom still struggles with the consequences of Brexit. To repeat, Italians don’t have much to celebrate. With the exception of Japan, no other G7 country has experienced a twentyfive-year period of economic stagnation. In 2023, the Italian real GDP was the same as that registred before the pre sub-prime financial crisis (Figure 2).

Figure 2

Since the late 1990s, low productivity, low growth and higher taxation have led to a relative decline of the country and were responsible for stagnant or declining living standards. In 2022, the Italian GDP per capita was 97% of the European Union average. To make a suitable comparison, French GDP per capita matched the European average, while the German one exceeded it by 17 percentage points 1.

So, how should we interpret the latest Italian GDP figures? Primarily, the recent rise in GDP appears to be part of a prolonged fifteen-year long recovery supported by a significant public expenditure program mostly funded by the EU, including the response to the Covid-19 pandemic. However, this program has had a less robust impact than expected, partly because only a small fraction of the available resources has been utilized. This is a consequence of a low-quality political-administrative apparatus 2.

A low quality political-administrative apparatus is what truly conditions the performance of the Italian economy, which works reasonably well when politicians and bureaucrats are not involved.  As far as the recent Next Generation EU investments programme is concerned, much of the Italian public spending it funded did not support investments aligned with the EU goals, but resulted in a rather poorly designed mix of incentives. For instance, almost €14 billion of the NGEU package have been spent to encourage homeowners to implement environmentally friendly and safety-related improvements to their properties (the total expenditure on this very initiative will amount to 160 billion). These incentives were provided recklessly and ineffectively, with the government covering the cost of renovations through a monetary transfer equal to 110% of the expenses, a mechanism that has fuelled a colossal problem of moral hazard and corruption, supported by all political parties over the years due to fear of alienating voters. As a result, the overall size of the 110% programme, over the years will amount to three quarters of all the funds allocated by the European Union under the Next Generation EU programme. Put differently, a period of relative prosperity has been financed with higher debt and future taxation. The title of the program may well turn out to be an irony for the very next generation, whose fate is conditioned by a general incapacity to conceive and implement a comprehensive strategic vision about the future.

1 Source: European Commission, https://ec.europa.eu/eurostat/statistics-explained/index.php?title=GDP_per_capita,_consumption_per_capita_and_price_level_indices#Overview

2 https://www.upbilancio.it/wp-content/uploads/2023/12/Memoria-UPB-sul-PNRR.pdf

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