Italy: At dark heart, the weak rule of law

Brussels: The European Commission forecasts that Italy’s gross domestic product (GDP) will grow by 1 per cent in 2024-25. Encouraging though this may seem, it hardly justifies much optimism in a longer-term perspective.

First, it reflects two large, one-off stimuli. In addition to massive public subsidies for home renovations, vast investments, funded by NextGenerationEU, are laid out in the country’s National Recovery and Resilience Plan (NRRP).

Secondly, the overall direction of economic policy is unconvincing. As with several previous governments, Giorgia Meloni’s administration appears to have resigned itself to the ineluctability of Italy’s decline, which began three decades ago, and seeks rather to secure privileges for special interests and its own electorate.

Roughly, the prevailing analyses of Italy’s singular decline belong to one of two schools of thought. A liberal one focuses mostly on the supply side, while a more interventionist strand mainly blames the weakness of aggregate demand.

Inspired by the distinction made by Peter Hall and David Soskice between ‘liberal’ and ‘co-ordinated’ market economies, the first school—mainly associated with Bocconi University and authors such as Francesco Giavazzi and Luigi Zingales—holds that, to reverse Italy’s decline, market forces must be unleashed. In this view, Italy approximates a co-ordinated market economy. As in Germany and much of continental Europe, Italian firms rely on strategic co-ordination with their workers, shareholders, customers, banks and competitors. Yet they generally achieve significantly worse results.

In this reading, three main obstacles hinder productivity growth. First, doing business in Italy is hard. Access to credit is limited, especially for small and medium-sized enterprises. Taxation is high and complex, the judicial system is extraordinarily slow and high entry barriers stymie competition.