Eleven years later, in 2019, Italy had still not yet reached the real economic output it had before the Lehman bankruptcy. Now the country is again suffering above-average economic consequences from the Corona pandemic. The already high national debt is rising. Credit-ratings are under considerable pressure.

Economic shocks and stagnation since the Lehman bankruptcy

Italy’s weak economic development began long before the 2008 global financial crisis that was defined by the Lehman bankruptcy. The country suffered yet another economic setback, followed by a slight economic recovery. However, this was interrupted by the Southern European sovereign debt crisis in 2010/2011. It weakened growth, especially in Spain, Portugal, Greece, and Italy.

Since then, the Italian economy has been growing only slowly. If the real gross domestic product (GDP) of the year 2007 is set equal to 100, it becomes apparent that even in 2019, Italy had not yet reached the GDP level of 2007. Only Greece was worse (see Fig. 1).

italy economy graph

Italy’s massive production collapse during the coronavirus crisis

Following the outbreak of the coronavirus COVID-19 in China, Italy was the European country where the pandemic was the first and the largest cause of illness and death. The economy and public life were shut down. As a result, industrial production collapsed in March 2020. Production normalized to 100 by 2015 fell from around 105 points in February 2020 to only around 75 points in March (see Fig. 2). Italy faced the biggest slump of all EU member states.

economy italy

The Italian economy is expected to collapse by almost 10 percent in 2020

For the already weak Italian economy, this slump in industrial production is expected to have a significant impact on the country’s economic development throughout 2020. In the case of physical goods (e.g., cars, furniture, and electronic equipment), though some of the sales lost in March and April may never be made up, consumers who postpone purchases until the end of the pandemic may boost demand later in the year or in 2021.

For many services that require personal contact, however, it is more difficult to make up for an occasional visit to a restaurant or leisure park, or a planned trip to a hotel. It is to be feared that the economic damage in many areas of personal services will be much greater than after the Lehman bankruptcy. This is a major problem for the Italian economy: In Italy, tourism accounts for around 13 percent of GDP. By comparison, in Germany, it is less than nine percent.

In view of these conditions, the spring forecast of the EU Commission  assumes that real GDP in Italy will fall by 9.5 percent in 2020. Only Greece faces a more severe economic slump (see Fig. 3).

italy economy

Italy is likely to have the highest government financing deficit in the Eurozone

An economic slump puts public finances under double pressure. On the one hand, government revenues fall because the tax base is shrinking. On the other hand, government spending increases, especially social spending and spending on economic stimulus packages needed to revive the economy.

The EU Commission assumes that Italy will have the highest public financing deficit in the entire Eurozone in 2020 (see Fig. 4).

italy economy graph

Italian State’s creditworthiness approaching the junk level 

The public debt ratio – i.e., the ratio of total government debt to GDP – rose sharply in Italy due to the recession following the Lehman bankruptcy and the Southern European sovereign debt crisis. In 2007, the year before the Lehman bankruptcy, Italy’s national debt ratio was around 104 percent of GDP according to Eurostat. In 2019 it was almost 135 percent (see Fig. 5). In its current spring forecast, the EU Commission assumes that debt will amount to just under 160 percent of GDP in 2020 ( see here , page 95 ).

economy italy

At the end of April 2020, the US rating agency Fitch lowered the credit rating for Italy from “BBB” to “BBB-” – only one notch above the so-called junk level. With this rating, it will become increasingly difficult to obtain new loans. However, these are absolutely necessary to mitigate the economic and social damage of the corona pandemic for the population.

Italy’s Economic Future Depends on Support and Reform

CoVid-19 pushed Italy’s economy from stagnation into a deep crisis. Before the ECB announced its PEPP program (The Pandemic Emergency Purchase Programme), the spread between German and Italian government bonds jumped. Indicating that financial markets have little confidence that the Italian economy can weather the challenges of the CoVid-19 crisis. The measures taken so far by the ECB and the EU institutions have at least stabilized the situation for now.

Worryingly, anti-European forces in Italy are benefiting greatly from the crisis. For a long time, Italy felt left alone by Europe in the crisis, with help coming from China, Russia, and even Cuba before other European countries sent support. Matteo Salvini, the leader of the Eurosceptic Lega, has also successfully pressured the government not to accept any money from the European Stability Mechanism for fear that the country would be subject to “extortionate” conditions. At the same time, most Italians have still not received the promised economic support during the crisis, which further fuels dissatisfaction with the government.

We have every right to be concerned about how Italy will recover from this crisis. It urgently needs more robust public and private investment. But the crisis will tend to exacerbate the need for savings in public and private households, while the progress of the corona pandemic is making it difficult for the tourism sector to play its usual role.

Nevertheless, Italy still has a competitive and highly specialized industry, and the “bel paese” remains attractive as a tourist destination. Also, on a positive note, during the crisis, a large number of businesses established stronger digital distribution channels. It is to be hoped that with the support of the EU Recovery Fund, increasing digitalization, and a normalization of economic activity, recovery is possible. However, the government can also significantly support the recovery by catching up on long-delayed reforms in the labor market via increasing investment and modernizing public administration.