Breaking the vicious circle: restoring economic growth and flexibility in Italy

Key points in this Briefing Paper:

1 As Europe slowly emerges from its economic crisis, Italy remains in recessionary mode. This poses a problem for EMU as a whole, given that Italy is its third largest economy and has the largest public debt.
2 The current malaise of the Italian economy is a story of high economic potential that has been wasted. Over the last decade its performance has trailed behind that of France and Germany.
3 Italy is trapped in a vicious circle that links sluggish growth with high public debt, fiscal tightness and difficult credit conditions. The crisis is therefore not only a matter of public finances; it has spilled from the macro level to the micro level, affecting firms and households.
4 Exports are one of the main drivers of Italy's growth, but relatively low labour productivity and structural problems, such as a disproportionate number of small firms and a low level of R&D activities and investment, are affecting competitiveness.
5 The government urgently needs to devise and implement policies to restore competitiveness and growth. Structural reforms should be supported by short-term measures aimed at boosting growth, creating new jobs and increasing credit provision.

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