ABSTRACT
In its open defiance of EU fiscal rules, Italy today finds itself alone, opposed not only – as one would logically expect – by the fiscal hawks in the Eurozone ‘North’, but also by those within the ‘South’ that Italy used to be able to count as friends or allies in the quest for Eurozone reform. The reason for this – the author argues – is that Italy represents a case of missed adjustment. Before the crisis, Italy did not experience the kind of wide-ranging imbalances that Greece, Ireland, Portugal, and Spain developed. This notwithstanding, the country came under market pressure in 2011, but the appointment of the technocratic Monti government was enough for market pressure to subside and for Italy to avoid an EU/IMF macroeconomic adjustment program. This apparently positive solution, however, backfired in the longer term, because it delayed adjustment and slowed the recovery, with social repercussions that eventually would find their voice in the election of 2018. While the program countries have undergone a massive adjustment, Italy has remained stuck in a low-growth limbo. As a consequence, the country is now an outlier in the Eurozone: it retains an especially high public debt burden, competitiveness remains low, long-term nominal and real rates are rising because of perceived political risk, long-term youth unemployment remains stubbornly high and persistent, and standards of living have been stagnating for years with effects on inequality. The political repercussions of these idiosyncrasies for the future of Italy and the Eurozone are not yet clear, but their importance could hardly be overestimated.
