Photo: RFF-CMCC-LOCALISED Webinar
Understanding the socioeconomic drivers of decarbonization and recognizing the role of structural factors in shaping the local and regional policies can benefit policy makers, citizens, and businesses in the EU. In addition to downscaling decarbonization pathways for local entities within the EU, the LOCALISED project tries to provide a fresh perspective on how social, political, and economic mechanisms at the macro level can hinder or accelerate the adoption of such localised decarbonization pathways.
On May 8, 2023, our partner CMCC hosted a seminar to discuss the structural barriers of economic growth and productivity in Italy. The speaker was Max Krahe from the Institute for socioeconomics at the University of Duisburg-Essen and the Institute for Macro-finance at Dezernat Zukunft who presented his report on “Understanding Italy’s Stagnation”. He explained how Italy’s prolonged economic stagnation stands as a pressing concern on fiscal, national, and European fronts. To address this complex issue, it is essential to delve into a comprehensive analysis of the root causes. Therefore, the report has aimed to provide a succinct overview, comparison, and evaluation of the primary explanations underpinning Italy’s economic standstill. Beginning with a retrospective glance at Italy’s recent economic performance, it scrutinises three overarching explanatory frameworks: the “unwillingness to reform” perspective, the monetary integration viewpoint, and the firm-level considerations. None of these theories, in isolation, offer an entirely convincing rationale for Italy’s stagnation. Consequently, the discussion around these narratives amalgamates the most promising elements from each, charting a path forward.
While the report does not present specific reform recommendations, its diagnosis underscores the imperative need for any credible reform package to address the deep-seated issues responsible for Italy’s economic stagnation. This structural analysis shows that Italy’s stagnation is not caused solely by excessive austerity or an inability to depreciate one’s currency, nor by a general absence of reform efforts over the last twenty years. Simply lifting deficit or debt limits or doubling down on past reform packages appears unpromising.
Instead, the problem appears to be that Italy adopted a doubly incoherent mix of structural reforms and austerity, and then stuck to it after its ineffectiveness had become apparent. This reform mix consisted in fiscal austerity combined with generally liberalizing structural reforms. The mix proved incoherent, first, because structural reforms struggle to produce good outcomes where aggregate demand is insufficient. It also proved incoherent, second, because the various reforms pulled against each other. For example, while some labour market reforms encouraged an Anglophone model of generalist skills and high labour mobility, others aimed at the German model of facilitating investments in firm-specific skills via stability and employment protection. As a result of this double incoherence, the reforms of the last twenty years dismantled Italy’s old, worn-out growth model without establishing a new one. Besides this incoherent reform mix, three institutional features appear to be important roadblocks to investment and productivity growth: organized crime, the judicial system, and – to a lesser extent – the quality of public administration, esp. at the local level. These reduce private investment and lower the quality of public investment.