Italy: Key Reforms and EU Funds Needed to Meet Ambitious Productivity and Growth Objectives

Productivity growth declined in Italy since the second half of the 1990s, when it was close to 1%, to stagnate around 0% on average since 2010.

Achieving the Italian government’s long-run productivity growth objectives for 2025-50 of circa 1.4%, which underpin medium- to long-term pension and health-care projections, would require a persistent productivity increase of between 1.2pps and 1.4pps, on average, over the next 30 years across regions – a rate of productivity growth not observed since the 1990s.

Scale of Italy’s productivity challenge and reform momentum after 2023 elections reflect concerns

While Next Generation EU funding of EUR 192bn over 2021-26 could provide an important boost, together with European structural and cohesion funds of around EUR 43bn, the scale of the productivity challenge and political commitment needed to sustain growth-enhancing reform momentum after next year’s elections reflect concerns.

Italy’s rates of productivity growth have not exceeded 1.0% over five years since the 1990s and have averaged 0.8pps less than that of the euro-area aggregate over the past 20 years (Figure 1).

Figure 1: Italy’s annual labour productivity levels vs that of euro-area aggregate, 1995=100

Real GDP per employed person

A widening north-south productivity gap

At the same, productivity varies significantly across Italy. National and regional levels of real GDP per employed person were higher during 1995 compared with by 2019, with labour productivity in the north remaining the highest, and the gap with the rest of Italy higher today compared with 20 years ago.

This north-south gap as regards real GDP per employed person widened from EUR 17,500 (2015 price reference levels) in 1995 to EUR 20,100 in 2019, while the north-centre gap also widened from EUR 5,100 to EUR 8,200. Critically, this widening gap is not because the north raised its productivity meaningfully, but rather due to productivity declining within the rest of Italy.

This latter fact reflects structural weaknesses as associated with infrastructure bottlenecks, inefficiency of public administration, labour-market rigidities and low investment into human capital that have always weighed more heavily on the centre and south of the country, despite reforms introduced during past decades.

National Recovery Plan endorsed by EU will provide Italy with resources for longer-lasting recovery

Implementation of the National Recovery Plan as endorsed by the European Union will provide Italy with EUR 191.5bn of resources to facilitate more stable, homogeneous and enduring recovery. Reversing a history of weak productivity and overcoming regional divergences are, in fact, fundamental for the Italian economy in meeting long-run challenges.

However, the government cannot rely only upon the EU Recovery Plan to boost southern Italy’s rate of economic growth and productivity. Continued central-government intervention, reform-implementation initiatives and increasing an annual level of public investment are vital as is deploying European structural and cohesion funds over a multi-year period.

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Alvise Lennkh is the Deputy Head of Sovereign and Public Sector ratings at Scope Ratings GmbH. Giulia Branz, Senior Analyst, and Alessandra Poli, Associate Analyst at Scope Ratings, contributed to writing this commentary.