By Scott Sumner
The title of this post was the campaign slogan of Silvio Berlusconi. It’s often translated as “Let’s Go Italy!” Instead, Berlusconi’s government presided over unprecedented economic decline, with real GDP per capita now lower than in the year 2000:
Berlusconi had the right idea—Italy does need a more dynamic economy—he simply failed at executing this policy.
Martin Wolf has a piece in the FT that shows how Italy has done poorer than other Eurozone countries with the exception of Greece:
Wolf is very pessimistic about Italy’s prospects:
Germany’s nominal GDP rose by 34 per cent between the first quarter of 2007 and the last quarter of 2017 (a compound average annual rate of 2.7 per cent). Italy’s rose by a mere 9 per cent over the same period (a compound average annual rate of 0.8 per cent).
Not surprisingly, given modest overall growth of nominal GDP, even Germany’s core annual inflation averaged a little over 1 per cent. Such low inflation in the core creditor country made adjustments in competitiveness within the eurozone far more difficult.
If the Italian government had been able to pursue its traditional policy of devaluation and inflation, it could have generated a far stronger rise in nominal GDP. That would surely also have delivered higher levels of real output. Italy’s real GDP in the last quarter of 2017 was, instead, 5 per cent below its level in the first quarter of 2007, while its real GDP per head was still some 9 per cent below the 2007 level a full decade later. No wonder Italians are disillusioned.
No doubt, Italy has huge structural economic problems, which tightly constrain growth, but potential output cannot have fallen this much since 2007. Italy also suffers from chronically deficient demand, a failing that the eurozone, as it is now run, is simply unable to remedy. This is partly because overall demand has been too weak and partly because, within the rules, demand cannot be directed to where it is weakest.
A prolonged recession, with high unemployment and low employment has inescapable political consequences. But the biggest frustration may be that the people Italians vote for have next to no room for manoeuvre.
Wolf has provided a reasonable analysis of the problems facing Italy, but in the end I think it’s a mistake to frame things in this way. It diverts attention away from what Italy needs to do.
There’s no obvious reason why Italy cannot grow fast. Consider:
1. Italy grew very dramatically between 1950 and 2000.
2. Northern Italy is fairly affluent by European standards.
3. Other countries such as Germany are able to do relatively well, despite using the euro as a currency.
4. Italian Americans have done well, despite the fact that most originally came from southern Italy, the most depressed part of the country
In recent months, I’ve seen a number of articles describing the plight of center-left parties in Europe. One problem might be their defeatist attitude. Having built the world’s most successful welfare states, Europe’s center-left doesn’t know where to go next. The southern half of Europe is not doing well, and voters can sense when a party is not offering any answers.
It’s true that negative demand shocks have adversely affected Italy. But that doesn’t explain why GDP has not risen since 2000. Wages are not sticky for 18 years. Italy also faces major supply side (“structural”) problems, not just a lack of demand.
I’m under no illusions that it will be easy to reform Italy’s economy. There are all sorts of special interest groups that would put up roadblocks. But it’s important to be clear as to what the problem is. A bit easier money from the ECB or fiscal transfers from Germany are not going to solve Italy’s growth problem. The only solution is supply-side reforms. Italy doesn’t need German money; they need German public policies. European voters sense this, which is why they have recently been opting for politicians that make bold promises, not those with a defeatist attitude. It doesn’t mean that the politicians making bold promises will actually deliver (as I noted earlier, Berlusconi failed to do so), rather that voters sense that it’s their only hope.
Wolf’s piece may be more “realistic” than this blog post. But in a technical sense Italy actually does have plenty of “room to manoeuvre”. The problems are mostly political. If they fail, it will not be because their situation is hopeless, rather because their leaders treated the situation as hopeless.
PS. I’m certainly no fan of Macron, who has a bit of a Napoleonic complex. But when one considers the current depressing state of European politics, his sort of “can do” center-left message may be the best of a bad lot. Other center-left parties might want to take a few pointers.