Italy: The sick man of Europe

Despite boasting the eighth-largest economy in the world, growth in Italy has stagnated for more than two decades. Economist Massimo Bassetti give us his six reasons for Italy’s weak economic growth over the last few decades:

1. High tax burden

• One of the most serious and long-standing problems explaining Italy’s disappointing growth performance is its high total tax rate, which discourages entrepreneurial activity and creates a competitive disadvantage in the international environment

2. Cumbersome bureaucracy

• Italy’s complex tax code, Byzantine regulation and inefficient public administration considerably handicap production activities and make it harder to do business in the country.

3. Inflexible labor laws

• Strict labor rules weigh on productivity—one of the main causes of Italy’s anemic growth—as they overprotect workers and thus weaken incentives to increase work efforts. They also help to explain the high number of small and medium-sized family-owned enterprises and, symmetrically, the low number of large companies—where productivity is traditionally higher. Moreover, the Italian courts tend to be heavily pro-employee, which can result in higher labor costs.

4. Inefficient educational system

• Italy ranks well below the OECD average in the PISA ranking. Its highly centralized and unionized educational system delivers poor results in terms of actual skills and looms behind the long-standing problem of the skill mismatch between labor supply and demand. Furthermore, as low educational outcomes negatively affect innovative capacity, they result in weaker business competitiveness and therefore negatively impact competitiveness of the broader national economy. This is all the more worrying given that Italy is aging rapidly and already has a very high proportion of citizens over 65 years of age.

5. Slow judicial system hampers the business environment

• According to the World Bank’s 2018 Doing Business report, it takes over a thousand days to enforce a contract in Italy, which places Italian courts among the slowest in the European Union. Compounding matters, judges interfere heavily in the economic life of enterprises, which frequently translates into judges replacing entrepreneurs in business decision making.

6. Huge public debt

• By raising the cost of debt servicing, Italy’s debt burden absorbs substantial financing resources, reducing funds for infrastructure investment (another of Italy’s weaknesses) and crowding out business investment. Moreover, it exposes the country to episodes of financial turbulence and diminishes its room for maneuver in case of an economic downturn.

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Author: Massimo Bassetti, Senior Economist

Date: November 13, 2018