The Eurozone’s Achilles Heel: Reassessing Italy’s Long Decline

Executive Summary

Italy’s long decline has become a systemic risk for Europe. Once a post-war growth engine, Italy now stands as the Eurozone’s most fragile large economy — the bloc’s “Achilles heel.” The study traces how domestic structural weaknesses, once sources of dynamism, have turned into liabilities under European and global constraints.

External discipline met internal fragilities. European integration and globalisation reinforced pre-existing patterns — small-firm dominance, labour fragmentation, and the North–South divide. These traits, once conducive to industrial diffusion, later amplified vulnerability when Italy lost monetary autonomy and fiscal flexibility.

Modernisation by external constraint failed. Reforms driven by EU convergence criteria and market liberalisation replaced selective industrial policy with horizontal measures, privatisation, and wage restraint. Instead of upgrading capabilities, this approach suppressed demand, weakened productivity, and deepened regional asymmetries.

A stagnant demand–innovation nexus locked Italy in decline. Labour market deregulation and wage compression reduced investment incentives. The prevalence of micro-firms limited innovation, while cuts to R&D, education, and regional policy aggravated structural gaps. The result: low productivity growth, poor technological renewal, and widening territorial divides.

Stability now depends on policy coordination — not austerity. The authors argue that Italy’s predicament mirrors broader Eurozone flaws. Restoring resilience requires aligning fiscal, industrial, and labour policies at both national and European levels — replacing austerity with sustained public investment, horizontal subsidies with targeted missions, and precarious work with stable, high-wage employment.

Policy recommendations

1. Replace pro-cyclical austerity with investment-led growth. Launch long-term public investment in infrastructure, innovation, and skills.

2. Adopt selective industrial policy. Target strategic sectors and value chains instead of diffuse subsidies.

3. Rebuild labour institutions. Promote high-quality, high-wage employment and collective bargaining to anchor competitiveness.

4. Strengthen EU-level coordination. Align national reforms with euro-area tools that reduce financial fragmentation and support convergence.