Key points

• The Draghi government’s goal of breaking the inertia of the long period of stagnation is well-founded, but ensuring certainty and stability in the political landscape is a prerequisite for reviving the Italian economy.

• There are at least three sources of uncertainty that weigh on this commitment. The first is an unexpected rise in interest rates, which could result from an acceleration in inflation expectations. The second is the sharp rise in Italy's public debt. The third is linked to how the domestic political landscape evolves.

• Three conditions are necessary to prevent the government’s challenge from failing to produce the desired results: setting long-term priorities for the structural transformation of the economy, distinguishing between expanding and slowing sectors; having tools and resources that facilitate the transition from emergency management to a phase of growth, supported by reforms and investments; and ensuring Italy has certainty regarding the medium- to long-term political landscape.

Within the framework of the European Union’s Recovery Facility, the Draghi government’s policy decisions align with the goal of steering the Italian economy back onto a path of growth. This assessment was expressed in the latest policy brief from the Luiss SEP – School of European Political Economy, authored by Carlo Bastasin, Lorenzo Bini Smaghi, Sergio De Nardis, Claudio De Vincenti, Valentina Meliciani (School Director), Marcello Messori, Stefano Micossi, Pier Carlo Padoan, and Gianni Toniolo.

In a global macroeconomic environment that is experiencing a vigorous recovery (by the end of 2022, 90% of advanced economies will return to pre-crisis per capita GDP levels), the strength of Italy’s recovery, according to Luiss SEP analysts, will hinge on how quickly consumption and investment grow. This, in turn, will be influenced by the degree of political stability that households and businesses can count on.

The National Recovery and Resilience Plan (PNRR), submitted to the European Union, represents a crucial opportunity “to shift the country’s inertia, addressing widespread bureaucratic inefficiencies, an environment that hinders innovation and change, pervasive rent-seeking, especially in the service sector, the common intertwining of ownership and management in family businesses, and the manufacturing sector’s excessive reliance on self-financing and bank credit, which results in an inability to reorganize production processes.” Through reforms, a stable return of real growth and inflation toward 2% would significantly contribute to reducing the ratio of public debt to GDP, which should be continuously monitored.

However, the favorable environment created by the combination of investments and reforms could be jeopardized by risks that should not be underestimated. The first is an unexpected rise in interest rates; the second is the reform measures having an insufficient impact on income growth, leading to a further increase in the debt-to-GDP ratio; the third concerns the Draghi government’s time horizon, which does not align with that of the initiatives funded by the PNRR.

In light of these risks, the policy brief from the Luiss School of European Political Economy suggests that policymakers focus on three conditions:

1. The first condition is to set long-term priorities for the structural transformation of the economy, as already outlined in the National Recovery and Resilience Plan. However, this should be done with a focus on the future growth capacity of the Italian economy, distinguishing between expanding and slowing sectors.
2. The second condition calls for the availability of tools and resources to facilitate the transition from emergency management, which characterized the response to the pandemic-induced recession, to a phase of growth supported by reforms and investments.
3. The third condition, as already emphasized, is that there be certainty regarding a medium- to long-term policy horizon, not just for the economy.

To read the full policy brief, click here