Understanding Italy’s Stagnation

Executive Summary

Italy’s stagnation is a European concern. Since the mid-1990s, Italy has recorded chronically low growth, weak investment, and declining productivity. This persistent underperformance weighs not only on the country itself but also on the stability of the euro area, where Italy is the third-largest economy.

Past policy mixes deepened the slowdown. In the 1990s and early 2000s, policymakers sought to revive growth through market-liberalising reforms and fiscal restraint, aiming to meet the Maastricht criteria. Rather than triggering recovery, this combination suppressed demand, weakened human capital growth, and discouraged investment. The policy mix became part of the problem, not the solution.

The euro crisis reinforced ineffective strategies. When bond spreads surged after 2008 and the ECB refused to act as a conventional lender of last resort, Italy was left highly exposed. Although euro area governance was later reformed, the changes largely entrenched the pre-crisis mix of liberalisation and restraint. Even once its ineffectiveness was clear, policymakers persisted, locking Italy into stagnation.

Single-factor explanations fall short. Accounts centred on reform unwillingness, monetary integration, or firm-level weakness each capture part of the story but none suffice on their own. Italy’s stagnation stems from the interaction of macro constraints, institutional structures, and firm-level dynamics, compounded by a failure to build sustained capabilities.

Future reform must avoid investment-suppressing mistakes. The paper does not present a full reform blueprint; it argues that any credible package must tackle the deep roots of stagnation while protecting investment. Positive conditionality — as in NextGenerationEU, where resources are unlocked for companies, institutions and productive investment — offers a promising path.

Policy recommendations

1. Stop repeating the old mix. Replace the 1990s–2010s combination of liberalisation and demand suppression with a strategy that safeguards productive investment and human-capital formation.

2. Use positive conditionality. Tie EU and national support to capability-building in firms, institutions and innovation — à la NextGenEU — rather than to generic deregulation targets.

3. Make investment the yardstick. Evaluate reforms by their effects on private and public investment, learning and productivity, not only by headline fiscal or “ease-of-doing-business” metrics.

4. Avoid pro-cyclical squeezes. Calibrate the macro stance so adjustment does not depress demand and capital expenditure during shocks; sequence reforms to build capacity before deepening exposure.

5. Institutionalise feedback and course-correction. Monitor outcomes continuously and reallocate effort when measures fail to lift investment and capabilities, preventing another decade of path-dependent underperformance.