Executive Summary

Confrontational government formed
After 2008, Italy experienced one of its most serious economic crises, with negative effects on industrial performance, employment and government budgets. National and international confidence in the economy and in the ability of the Italian state to face big external shocks had been seriously damaged. Post-crisis recovery was slow. Illegal immigration, with thousands of refugees arriving across the Mediterranean Sea, added new challenges. This fostered a strong growth in populist and anti-establishment parties. Following the electoral promises of these parties, the cabinet that formed after the 2018 elections, and supported by Salvini’s League (Lega) and Di Maio’s Five Star Movement (Movimento Cinque Stelle), adopted a confrontational attitude toward the European Union and its budgetary rules.
Pandemic topples a more prudent successor
Contrary to the expectations of governing parties, their spending policies did not boost Italy’s slow recovery and isolated the country in the crucial EU decision-making forums. Relations with EU authorities became strained and international financial markets were scared, producing a significant increase in the interest-rate spread between Italian and German state bonds. The populist coalition could not last for long and a more prudent second Conte government, supported by the Five Star Movement and Democratic Party, adopted a more pro-European policy. This heterogeneous coalition, however, proved insufficiently strong to face the severe consequences of the COVID-19 pandemic that developed through 2020. In February 2021, it collapsed.
Grand coalition under dominant Draghi
The lack of a viable majority coalition induced the head of state to call Mario Draghi to form an emergency cabinet supported by a grand coalition of all parties, with the exception of Brothers of Italy (Fratelli d’Italia, FdI). The international prestige of the prime minister and the need to guide the implementation of the first steps of the Recovery and Resilience Plan (PNRR) in order to obtain substantial EU funding from the Next Generation EU program afforded the new prime minister a strong dominance over the coalition parties throughout 2021.
Recovery swifter
than expected
The new cabinet has been able to restore internal and international confidence in Italy. By the end of 2021, it has significantly contributed to a much speedier economic recovery than was expected in the spring. In addition, a strong vaccination campaign effectively contained COVID-19 contagions by the end of the year.
Improvement in public sector performance
Several of the new judicial and public administration provisions adopted by the Draghi government have raised positive expectations about an improvement in public sector performances. Since this is one of Italy’s most relevant weaknesses, it is paramount to see whether these initial steps will be pursued over the coming months (and years).
Investment in infrastructure increases
The large amount of funds made available to Italy through the Next Generation EU program are enabling the country to significantly increase capital investments in material and digital infrastructure, and in the fields of environmental transition and education. This promises to compensate for the exceedingly low levels of past EU funding.
However, some of the country’s most serious problems are still not sufficiently tackled.
Local authority powers must be clarified
The relationship between the central government and local authorities has not yet found a satisfactory equilibrium. A clearer division of responsibilities is required, sufficient funds must be made available to local authorities to fulfill their functions and mechanisms of accountability must be improved.
Demographic change
a threat
The demography of the country with an aging population and a very low birthrate poses a serious threat to the future sustainability of Italy’s pension and welfare system. Fiscal support for families with children has been increased, but is still too low. The so-called citizenship income represents a start at addressing the problem of poverty, but the bureaucratic implementation of this measure is still under review.
Labor market badly polarized
The labor market is still too polarized between protected and non-protected sectors of the population, and lacks the flexibility to adapt to rapid economic changes. Young people and women are the most exposed to the negative impacts of this situation.
Weaknesses in
education system
The education system shows significant weaknesses with regard to resources, infrastructure, quality of personnel and ability to provide the skills required by the economic system.
Corruption an
ongoing concern
Corruption continues to be a key factor undermining the quality of the public administration. It distorts public service provision and economic activity, and inhibits modernization. Some progress in addressing this problem has been made, but efforts must continue.
EU relationship
The more active and cooperative attitude adopted by the Draghi government in the European Union is re-establishing a more positive relationship between Italy and the European Union.
Steering capacity improving
The Draghi government has shown a greater capacity to design and steer policies compared with previous governments. However, only the next years will show if this shift in governance style is temporary or marks a real change.
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