Italy’s economic problems are rooted in low productivity, unfavorable demographics, and weak governance in many parts of the country – all of which pre-date the introduction of the euro in 1999. While Italy’s mainstream political leaders hoped that eurozone membership would create the conditions for far-reaching economic reform, the euro has instead deprived Italy of the means to engage in competitive devaluation.
With the exception of Greece, Italy has fared worse than any other euro member state since the 2008 financial crisis. But there is no use playing the blame game. Responsibility lies partly with the EU and its pro-cyclical policy rules, but mainly with Italy’s past leaders, all of whom failed to address its structural problems. [...]
Beyond this domestic agenda, Italy also needs to pursue reforms vis-à-vis the EU, starting with a relaxation of constraints on public spending for pro-growth investments and new partnerships. More investment will require additional fiscal space. But, more importantly, Italy and the EU both need new ideas, and more trust on each side.
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