Italy came 37th out of 142 countries ranked in the Prosperity Index by the Legatum Institute, a London-based think tank, falling from 25th place in 2010.
This year’s ranking puts the country a spot below Kuwait and one place above Israel.
“The main problems in Italy are the economy, governance and personal freedoms,” Novella Bottini, a spokeswoman for the think-tank, told The Local.
But the country also does badly when it comes to people's perception, with Italians being increasingly pessimistic about their current situation, she added.
When asked, "Did you experience worrying yesterday?", 66 percent of Italians said yes, compared to the global and European average of 37 percent.
With unemployment at 12.6 percent, only 3.1 percent of Italians think their country is a good place to find a job. Globally, only the Greeks are more pessimistic about the job market.
While Bottini said the study shows Italy performing “worse and worse” over the years, she suggested that Italians can improve their own situation.
“Italians can do more in the social capital area, by getting more involved in volunteer work or giving donations.
“They can also be much more involved in the election process, to increase the approval of the government. This is a huge problem, which seems to get bigger,” she said.
Having seen four prime ministers over the past three years, Italians also have a very poor view of politics. Government approval stands at 16 percent, compared to the European average of 44 percent.
As the report notes, such a low approval rating makes it “incredibly difficult” for the government to revive the economy.
“Italy has had particular problems in this regard with three different governments holding power since the crash. The most recent, led by Matteo Renzi, continues to struggle to make key political and economic reforms,” the study said.
Italy is also viewed as increasingly corrupt by its citizens. Whereas 78 percent of people thought business and government were corrupt in 2010, this figure jumped to 88 percent this year.
This puts greater strain on Renzi’s cabinet, the Legatum Institute says: “Poor governance can become self-fulfilling in this respect, as ineffective governments fail to make necessary reforms and become even more unpopular and ineffective as a result.”
Financial difficulties have also led to a rise in xenophobia in Italy, with tolerance for immigrants and minorities decreasing by 13 percent between 2009 and 2012.
Along with Greece and Spain, also hit by the financial crisis, in Italy just 67 percent of people believed society is tolerant to immigrants and minorities.
The Legatum Institute suggests the three countries follow steps taken by more prosperous countries, by implementing reforms to improve social capital, personal freedom, and good governance.
“Such reforms may be implemented without significant increases in public spending, but could result in large increases in wealth and wellbeing and, ultimately, prosperity,” the Institute says.
The most prosperous country in the world is Norway, followed by Switzerland and New Zealand, while the Democratic Republic of Congo, Chad and the Central African Republic rank lowest.