Executive Summary

Decade of crisis has destroyed confidence
Over the past decade, Italy has experienced one of its most serious economic crises, which has negatively affected industry, employment and government budgets. National and international confidence in the economy have been seriously damaged and are yet to fully recover. Increased immigration with refugees arriving from Africa and a major earthquake in 2016 have added new challenges. Recent governments have faced a difficult dilemma of pursuing fiscal stabilization or promoting economic recovery. While the outgoing Gentiloni cabinet tried to achieve a delicate balance between fiscal sustainability (and respect for EU rules) and promoting economic development, the two political parties that obtained the best results in the 2018 elections, the Five Star Movement (5SM) of Di Maio and the Northern League of Salvini, share a much more confrontational attitude toward the European Union and its budgetary rules.
Coalition joins parties
with very different ideas
In spite of some very important differences in political orientation and policy programs, these two parties have reached an agreement to form a new government. However, the specific priorities of the two parties remain rather different. The policies of 5SM (e.g., its costly “citizenship income”) are oriented toward southern Italian, young unemployed and poor voters. In contrast, the tax reductions and pension reform proposed by the Northern League are tailored more for northern Italian voters, older workers and small entrepreneurs. Combining the two programs would necessarily involve a significant increase in public expenditure and the public deficit. This dramatic change from the more prudent conduct of the previous government has immediately strained relations with EU authorities and has scared the international financial markets, producing a significant increase in the spread between Italian and German state bonds.
Stimulus policies carry weak multiplier effect
While the government has justified this move on the basis that the increased expenditure will boost Italy’s slow economic recovery and make Italian state debt more sustainable, most internal and external observers are not convinced about this outcome because the specific policies proposed are expected to have a weak fiscal multiplier effect.
Debt demands more substantial consolidation
The high level of public debt, which leaves the economy vulnerable to external financial shocks, will require a more aggressive policy of fiscal consolidation in the near future. A bolder approach to the spending review process should be adopted with the twin purpose of cutting waste and enhancing the efficiency of state bureaucracy.
Administrative reforms remain in early stages
The reform of public administration initiated under previous governments has not made enough progress and would require a more vigorous effort. The quality and efficiency of public administration is still far from satisfactory. Civil service recruitment at all levels needs more selective and less cumbersome procedures. At the same time, a rigorous performance evaluation process must be fully implemented for senior civil servants. The efficiency and speed of judicial procedures must also be significantly improved, and the evaluation of the quality of judicial work must be stricter.
Corruption distorting economy
Corruption continues to be a key factor undermining the quality of public administration. It distorts public service provision and economic activity, and inhibits modernization. Important progress in addressing this problem has been made but efforts must continue.
Tensions divide local, central governments
The relationship between central government and local authorities has not found a satisfactory equilibrium. A clearer division of responsibilities is required, while sufficient funds must be made available to local authorities to fulfill their functions and mechanisms of accountability must be improved.
Economy remains below pre-crisis levels
Since the end of 2014, the economy has slowly begun to recover, but remains below pre-crisis levels. Further economic modernization and liberalization are required, while recent labor, social and industrial reforms are only just beginning to affect economic growth.
Failings in family and
social policies
The recent economic and financial crises have exposed failings in family and social policies. Italy has an aging population and very low birthrate, which current policies are failing to address. Fiscal support for families with children is still too low. Similarly, measures to improve gender equality in the workplace, and reconcile work and family life are weak. Poverty also needs to become a much more important priority.
Weak EU support has boosted euroskeptics
Increased dissatisfaction among the public and political elites about the weak support given by EU policies to the solution of the economic and immigration crises has significantly contributed to the success of the euroskeptic coalition government parties. While there is nothing wrong in advocating a more assertive leadership able to defend the interests of the country in Brussels, this strategy can only be effective if the Italian government is perceived as a credible partner and is able to enlist the support of other EU member states. Respecting the commitments of previous governments is a crucial precondition for assuming a constructive role in EU decision-making. An aggressive strategy of non-compliance with EU rules may simply isolate Italy in the European Union, a position which is not in Italy’s national interest. Further, Italy’s new government should take care to preserve peace and stability in the country, and stop aggressive rhetoric against minorities, immigrants and foreigners.
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