Four key economic challenges facing Italy’s new government

Four key economic challenges facing Italy's new government
Italian president Sergio Mattarella (L) and Giuseppe Conte. Photo: AFP/Quirinale Presidential Press Office
Italy's Giuseppe Conte acknowledged it was a "very delicate phase" for the country as he agreed to lead a new coalition government following the fall of a populist coalition. Here are some of the key economic challenges facing the debt-burdened nation.

1. Stagnant growth

The eurozone's third economy is not well. After a technical recession in the second half of 2018, when output shrank by 0.1 percent, Italy's economy saw zero growth in gross domestic product in the first half of 2019.

Both the European Commission and International Monetary Fund predict the Italian GDP will grow by just 0.1 percent this year, while the outgoing government predicted growth of 0.2 percent. Some experts think Italy could slip back into recession.

The country is feeling the squeeze from generally slow European growth and the economic tensions between Washington and Beijing, but also by businesses' reluctance to invest in the current global environment and domestic political
instability.

2. High unemployment

Unemployment has declined slightly since the start of the year but in June still stood at 9.7 percent of the active population. That compares with the eurozone average of 7.5 percent and is much higher than 3.4 percent in the Netherlands and five percent in Germany.

Youth unemployment is even more worrying. Around 28 percent of young people aged 15-24 who want a job are unemployed, almost double the European average of 15.4 percent.

3. Poverty level and geographical divides

Five million Italians — or 8.4 percent of the population — live in poverty.

There is a yawning gap between the north and south of the country. In the south, 10 percent of families live in poverty, compared to 5.8 percent in the more industrialized north.

The new government will have to increase efforts to revitalize the south, which workers are increasingly leaving due to a lack of jobs and infrastructure such as roads, schools and social services.

4. Debt (lots of it)

The economy is further unbalanced by Italy's colossal public debt which stands at more than 2.3 billion euros or 132 percent of GDP, the highest rate in the eurozone after Greece.

Brussels is constantly calling on Rome to reduce its deficit, and thus its debt. The outgoing populist government was frequently clashed with the European Commission, mainly over public spending.

The Five Star Movement-League coalition eventually accepted to reduce its deficit to 2.04 percent of GDP in 2019, instead of 2.4 percent, but the 2020 budget will again be problematic.

If Italy does not manage to reduce spending by 23 billion euros, it will face an automatic rise in value-added tax on January 1st. Such a measure would reduce consumer spending, hit the poor the most and hurt business profits as investment is reduced.

The result would be “a vicious circle, because if businesses make fewer profits, they will invest less”, said Carlo Alberto Carnavale Maffe, economics lecturer at Milan's Bocconi University.

At the same time, “exports are in crisis because of the trade war started by the United States and the German economic slowdown,” he said.

Agreeing the budget will be one of the first tasks of the incoming government. In order to satisfy Brussels, the government will need either to slash public spending or raise taxes. 

By Celine Cornu


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