On the occasion of the latest political developments in Italy and the resignation of Prime Minister Mario Draghi in a period of inflationary pressures, geopolitical tensions and uncertainty, Eurobank presents a comparative analysis of the path of real GDP in the Eurozone, Italy and Greece from 1995 to 2021.
Based on 2021 data, Italy’s economy is the 3rd largest in the Eurozone after Germany and France with a nominal GDP of €1,775.4 billion (14.5% of the Eurozone total), the 3rd largest in population (59.8 million) after Germany and France, has the 2nd highest public debt as a percentage of GDP (150.8%) after Greece, the 3rd highest unemployment rate (9.5% of the workforce) after Spain and Greece and finally the most important, it is an average stagnant economy for the last 20 years.
The bank presents the annual real GDP of the Eurozone, Italy and Greece from 1995 to 2021 in index terms based on the year 1995. We divide the total period into 5 sub-periods, 4 6-year and 1 two-year periods based on cyclical turning points fluctuations (expansion, top, bend, bottom…) of the aforementioned economies:
• The first covers the 6 years 1995-2001, i.e. the period after the signing of the Maastricht Treaty until the entry of Greece into the Economic and Monetary Union (EMU).
• The second in the 6 years 2001-2007, i.e. the period before the outbreak of the global financial crisis, with the average annual real growth rate in Italy slowing down and the economy entering the first phase of the long-term stagnation experienced in the last 20 years .
• The third in the 6 years 2007-2013, i.e. the period of the great recession for Greece, the relatively milder recession for Italy and the permanent deviation of the Eurozone from the growth path it followed on average in the 12 years 1995-2007.
• The fourth in the 6-year period 2013-2019, i.e. the period of stagnation and weak recovery for Greece and Italy.
• The fifth in the two years 2019-2021, i.e. the period of the health crisis of the COVID-19 coronavirus. Some key observations are as follows:
1. Italy’s economy has been in a stagnation trap for two decades. This performance reflects weaknesses in the supply side and has implications for citizens’ disposable income and social welfare in general.
In detail, from the end of 1995 to the end of 2021, the average annual real growth rate was 0.5%, the lowest among the Eurozone member states. The second lowest was in Greece at 0.8%, as the great recession of 2007-2013 partially offset the strong expansion of 1995-2007.
Finally, in the Eurozone, the corresponding average annual real growth rate was 1.6%. The aforementioned performance resulted in the real GDP in Italy in 2021 being increased by only 11.9% compared to 1995 (a period of 26 years!), in Greece by 19.2% and in the Eurozone by 48.3%. If the comparison is made with 2001 (a period of 20 years!), the real GDP in Italy and Greece in 2021 was reduced by 0.9% and 4.3% respectively, while in the Eurozone it increased by 24.1%.
2. The poor long-term performance of the Italian economy stems mainly from the decline in productivity from 2001 onwards (2001-2021 average -0.2% YoY), i.e. from the worsening efficiency in the use of production factors. Additionally, working hours are down compared to 2007 (2007-2021 average -0.6% YoY) and fixed capital is down slightly since early 2010.
The governor of the Bank of Italy (BANCA D’ITALIA) Ignazio Visco, in a presentation in Autumn 2020 (EuroScience Open Forum 2020) emphasized the need to implement reforms in order to address the long-term development problem of the Italian economy.
He proposed, in particular, the improvement of the quality and efficiency of public services, the increase of public investments, the improvement of justice services, the reduction of administrative and bureaucratic obstacles for private investment, the reduction of tax evasion and corruption.
In addition, he stated that the main factors for Italy’s anemic growth since the mid-1990s are the low expenditure on research and development (R&D), the low degree of efficiency of investment in education (accumulation of human capital) and the structural characteristics of country’s productive model (small businesses produce ½ of the total gross value added in industry and services, excluding financial services).
It is worth noting that similar structural reforms have been proposed by the institutions for the Greek economy (during the adjustment programs and enhanced supervision) so that it picks up speed in terms of sustainable growth.
3. The development challenges, not only for Greece and Italy, but for the entire Eurozone are important. After the global financial crisis and the debt crisis, disturbances that seem to have had permanent effects on the development dynamics of the Eurozone (the economy did not return to the growth path of 1995-2007), the pandemic, the energy crisis and demographic trends are creating new obstacles. The effective use of the resources of the Recovery and Resilience Fund can lead to an improvement of development potential.
Source: Capital
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