Warning Lights Flashing Red for Italian Economy

By Conor Gallagher

The latest uproar in international media about the Meloni government in Italy is over a bill that aims to use less English terms. (Like many languages, Italian has adopted a lot of English words for recent items or fads that emerge from the Anglosphere like “smart working.”)

The proposed law provides a useful distraction for the Meloni government that is overseeing a sinking economy and has accomplished little – especially for a “fascist” government. Meloni and her coalition’s focus on migrants, same-sex couples’ adoptions, raves and English words has proved effective – at least in the polls as Meloni and the Brothers of Italy (Fdl) have risen since coming to power in September.

Meanwhile, for the Italian economy, which has been surprisingly resilient following the war in Ukraine and the loss of Russian energy, there are dark clouds on the horizon – some of which are beyond the government’s control, but others are self-inflicted wounds.

Europe’s second largest industrial base is looking at a sustained slowdown – or worse. The Italian economy shrank 0.1 percent in the fourth quarter of 2022. According to Eurostat, the country’s employment rate stands at 60.1 percent, which is now dead last in the EU after being overtaken by Greece.

Italian economy minister Giancarlo Giorgetti maintains that all is well and that the country might even upgrade its 2023 forecast for economic growth from 0.6 percent to 1 percent, but the headwinds tell a different story.

Here are some of the factors that are beginning to drive the Italian economy into the mud:

  • European Central Bank rate hikes.
  • Higher energy costs.
  • Meloni and company got rid of two programs that effectively provided a stimulus for the economy: a meager basic income and the Superbonus, which encouraged renovations of buildings and was credited with generating hundreds of thousands of jobs.
  • Italy is now at risk of losing billions in EU recovery funds.

The EU Recovery Funds

The European Commission recently froze a 19 billion euro installment for Italy, and asked for clarification on Rome’s efforts to meet the conditions linked to the money. The cash is part of the EU’s post-pandemic recovery funds, of which 200 billion euros was earmarked for Rome in the form of grants and cheap loans through 2026, making it the largest beneficiary in the bloc.

Meloni says she’s not worried, but Rome is falling behind on “reforms” agreed with Brussels in return for the cash and is also struggling to spend the money it already received. Some in Meloni’s coalition are even saying they don’t want the money even though it would likely lower growth prospects and hit the country’s credit rating.

According to Il Fatto Quotidiano, the lack of Rome-Brussels alignment are the result of the following:

  • A shortage of personnel. The previous government under former ECB president and Goldman Sachs bigwig Mario Draghi instituted a plan to hire people ad hoc. It has flopped as the low pay and short term contracts aren’t attracting anyone, which leads to…
  • The procurement process grinding to a halt. Despite efforts to follow Brussel’s edicts and remove bureaucracy, nothing happens. As Italian  experts predicted, “removing bureaucracy is of little use if whoever has to oversee the work does not have the skills to manage it.”
  • A rise in costs. The EU being party to the war against Russia in Ukraine has resulted in higher costs due to the higher price for energy and the ECB interest rate hikes.
  • The possibility that the EU is intentionally sabotaging the process. Brussels is taking longer to approve Italian plans and there is much more negotiating than when Draghi was in office.

The Superbonus Gets the Ax

The superbonus for building renovation, under which homeowners could get 110 percent of energy efficiency renovation expenditures covered by the government, was adopted in the wake of the coronavirus pandemic in an effort to restart the Italian economy.

But the Meloni government, strapped by energy crisis spending and tax cuts for big business, slashed the program so it only covers only 90 percent of the cost and lessen its impact on this year’s finances. Former prime minister Giuseppe Conte said the measure created 900,000 jobs and helped homeowners save an average of 964 euros per year. That economic stimulus is now gone.

The effect is likely already being felt in the slowing economy, and the abrupt cancellation is causing a major headache for companies, households, and banks: how to recover an estimated 20 billion euros of credits for work that has already been completed or committed to, but the government hasn’t paid out. From Reuters:

Facebook support groups have popped up, telling horror stories of blocks of flats left uninhabitable after construction firms pulled out mid-way through major renovations, or of homeowners left nursing huge debts with no relief in sight.

“The state promised people that they would get their money back. They encouraged people to do this work, and then they went back on their word. It is a disaster,” Pierangeli said.

Banks have said there are more tax credits in circulation than they can deduct from their own tax bills. The government has contested this, but is also looking into the idea of letting banks keep tax returns paid through their system by clients.

Ministers have also sought to reassure banks they will not be held responsible if it transpires the credits are fraudulent, generated by cowboy building firms for fictitious work.

Prior to the war in Ukraine, Italy imported around 40 percent of its gas from Russia and has been forced to try to make up the difference with LNG imports and increased deliveries from Algeria. In response, Rome recently bailed on previous climate commitments. From Reuters: 

While Italy is still in discussion with the European Union about the fate of a number of green directives, it unilaterally walked away from a pledge made at the 2021 Cop26 summit in Glasgow to turn off the funding taps for foreign fossil fuel projects by the end of last year.

The country’s export credit agency SACE said in a statement that it would continue to support oil distribution projects until January 2028, and oil storage and refining programmes until January 2024.

It declined to set any timetable to withhold funding for gas projects in these three areas.

While the cancellation of the Superbonus hurts the economy in the present, the climate policy will increasingly put Rome at odds with Brussels’ climate agenda moving forward.

Basic Income No More

Italy’s Five Star movement came to power in 2018 with an ambitious program for Italy’s working class. Its draft budget plan called for an increase in the public deficit, a tax amnesty for lower incomes, pension reform allowing early retirement, and a basic income for citizens.

It was subsequently harassed by Brussels and threatened with the dreaded excessive deficit procedure. One of its few achievements (along with the above-mentioned Superbonus) was a measly citizens’ wage that provides the unemployed an average of 567 euros a month.

Well, on March 31 Meloni celebrated her abolition of the basic income. Despite the program providing a mild stimulus to the economy, Meloni said its elimination will force people back to work. “Where is the slump in the economy and employment?” she asked.

She failed to mention that roughly 40 percent of Italian workers earn less than 10 euros an hour in the country where average wages have fallen 2.9 percent since 1990. Italy doesn’t even have a minimum wage and Meloni’s ruling coalition has no interest in introducing one (nor does the opposition).

Meanwhile, masses of young Italians under 35 are emigrating abroad as their employment prospects are so dismal at home. We’ll have to wait and see, but Meloni’s elimination of basic income might only exacerbate this trend. Money that could have gone to continuing the reddito di cittadinanza will continue to be used to deal with Italy’s higher financing costs and energy bills.

Rate Hikes and Energy Costs

The ECB most recently raised rates by 50 basis points to 3 percent in mid-March. Policymakers remain committed to more hikes, albeit at a possibly slower pace, until inflation is down to the two percent target. The obsession with core inflation might be misguided…

…but the ECB plans to stick with it nonetheless. This fight against inflation has driven up the cost of Italian borrowing to over four percent, which eats away at Rome’s budget.

Although energy costs fell slightly in March, they are still the main driver of inflation in Europe over the past year. And the primary reason they’re up is because the EU, as junior partner to the US, is in a fight against Russia and cut itself off from Russian energy.

Italian manufacturing saw a slight reprieve in February as manufacturing input costs fell for the first time since June 2020, but they are still uncompetitively high. Prior to February manufacturing activity had contracted for a seven months running as firms began self-rationing over the summer. That came despite Rome diverting money from other programs in order to shovel it at the energy crisis.

Rome is spending more than 21 billion euros to help companies and households pay electricity and gas bills in just the first quarter of this year. And it’s working on extending those relief measures for the remainder of this year, and will almost certainly have to extend them further. That comes on top of the roughly 75 billion euros Rome spent on energy assistance last year.

At the same time, the Meloni government is trying to lower the country’s public debt, which is likely to only make matters worse. Should the Italian economic situation deteriorate enough to the point a selloff in Italian bonds occurs, Rome would have no choice but to turn to the European Stability Mechanism (ESM), which was set up in 2012 after the sovereign debt crisis and aims to help bail out countries in exchange for strict reforms (think Greece-level austerity and privatization).

Trouble is, Italy is still the only Eurozone country not to approve reforms to the ESM. Those include “a stronger role in future economic adjustment programmes and crisis prevention. In addition, the application process for ESM precautionary credit lines will be easier, and the instruments will be more effective.”

Italian officials say approval of such terms would increase the risk of a restructuring of Italy’s national debt, the loss of what little economic sovereignty Italy has left, and a further deterioration in standard of living should the country have to turn to the ESM.

It should be noted that some Italy observers think Meloni and company’s public opposition to ESM reforms is just part of the show:

This is starting to look like just another act in the continuation of Italy’s decades-long neoliberal project that has destroyed most Italians’ standard of living. The central cast is new (the purported fascist) and the crisis plot has been rewritten (energy and inflation), but the story remains the same.

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  1. The Rev Kev

    Been reading for years how Italy was the one country in Europe that was most likely to have a full financial crisis. Yes, all the factors listed here really have been putting the Italian economy under the gun but I have always had the impression that Italy’s problems are more structural in nature. This being the case, when Conor says-

    ‘This is starting to look like just another act in the continuation of Italy’s decades-long neoliberal project that has destroyed most Italians’ standard of living. The central cast is new (the purported fascist) and the crisis plot has been rewritten (energy and inflation), but the story remains the same.’

    it shows how for years if not decades that there was no leadership in Italy willing to undertake the deep reforms to build up and reform the Italian economy. Any ‘reforms’ done were only those to benefit the elite like any good neoliberal would do.

    1. DJG, Reality Czar

      Rev Kev: Yes, we have to be careful what we mean by reforms. I’m so old I recall when the doofussy Luigi Zingales, now a professor of entrepreneurial swampiness at Booth UChicago, was proposing that a big problem in Italy was that the taxis weren’t “reformed.” Uber for thee, but not for me. And many of the proposed reforms will cause further deterioration of the national health system and further “precariatize” workers.

      That written, Conor Gallagher’s list of the central mysteries of the current ruling coalition has these items:

      –Meloni and company got rid of two programs that effectively provided a stimulus for the economy: a meager basic income and the Superbonus, which encouraged renovations of buildings and was credited with generating hundreds of thousands of jobs.
      –Italy is now at risk of losing billions in EU recovery funds.

      And we’re supposed to be worried about fascism? Meloni’s party tends not to favor the SuperBonus. But Berlusconi does. (Like Trump, he made scads of money in real estate.) So there’s tension in the coalition.

      The PNRR funds are something Meloni wants and her partners are getting jittery about. A true mystery. (Till one remembers that Giuseppe Conte negotiated the windfall and the first person to mess with the PNRR was Saint Mario Draghi. Oh.)

      Conor Gallagher puts his finger on the big issue: Lack of job creation. Which leads to large numbers of young Italians living in London (well, now stranded in London). One would think that in a country that has no minimum-wage law, the Partito Democratico under the new leadership of Schlein, would be all over working conditions and pay. You’d be wrong.

      All in all, the structural problems center on lack of pay, lack of job opportunities for young people, excessive privatization (especially health care), and lack of other worker protections like pregnancy leave.

      But the EU bureaucrats want to balance the Italian budget for the Italians and parachute in mediocrities like Mario Monti and Mario Draghi.

      1. Michaelmas

        DJG, Reality Czar: …Lack of job creation. Which leads to large numbers of young Italians living in London (well, now stranded in London).

        I’ve wondered about that. I moved from the US a year ago and am currently living in Notting Hill in London, a block from the Portabello Road. London’s a babel, of course, but every time I’m out on the streets I’ve been struck by how at least half, and maybe two-thirds of the foreign speakers, I hear seem to be young Italians

        DJG, Reality Czar: the EU bureaucrats want to balance the Italian budget for the Italians and parachute in mediocrities like … Mario Draghi.

        Draghi’s no mediocrity, but quite proficient at what he does.

      2. digi_owl

        I suspect in this day and age it is beneficial for the globalists to willfully confuse protectionist nationalism with expansionist fascism.

  2. zagonostra

    Not directly related to Italian Economy, but Meloni’s trip to Bucha to condemn the unsubstantiated Russian “massacre” was a debacle. To-date, the UN has still not conducted an independent investigation and recent reports I’ve read indicate that those murdered, were sympathetic to Russia.

    Seems that Europe, especially Germany but also Italy, is unable to pursue policies that are economically beneficial without approval of the hegemon.

    1. tevhatch

      Oh, it’s related. Russia will bump Italian products further up the “import replacement investment fund” que, and gas is going to be that much more expensive.

  3. Questa Nota

    Are there Italy-based readers to give a local perspective like David, Plutonium Kun, Rev Kev, Colonel Smithers and others do for other countries?
    Sorry if I overlooked people.

    1. lou strong

      Italian citizen here.
      I think that DJG Reality Czar gave a fair overview.
      I will add some institutional and political ideas.

      Italy is a dual protectorate. US protectorate for the foreign policy, and EU ordoliberal or neoliberal , if you prefer, protectorate via euro currency management for the economic issues. For both issues, the Proconsul, the man really in charge, is the Italian President of the Republic, the only local politician who is not accountable for anything, so the only one ” legitimized” to do whatever it’s needed to do in order to comply to the protectorate bindings.
      Be them Meloni or Draghi or somebody’s else, political personalities are less relevant than the Proconsul of the moment , and the Proconsul takes his real power by his role towards the external powers.
      For example, while the then Prime Minister Giuseppe Conte took the political responsability for the PNRR European funds of the Next Generation etc, he was “supervised” during all the process by the President of the Republic. At the same time these funds , who were presented as partially composed by subsidies, are a complicated account game whose real purpose is to deepen the EU Commission control over Italian economy, as it’s happening.

      1. DJG, Reality Czar

        lou strong:


        This issue of Italy as a double protectorate, or satellite nation not being treated well, is bubbling up these days in relation to the war in Ukraine. I don’t expect this line of criticism to go away, either, in that many people are making it clear that Italy’s interests are being undermined. Alessandro Orsini got into the most trouble for saying so, but others are making similar criticisms, such as Alessandro di Battista and Donatella di Cesare.

    1. Scylla

      Yes- I have an Italian table saw. Amazing machine. I can set a dime on edge on the table, start the machine, run it for hours, and the dime never moves. It would be an absolute shame for the world to lose that level of quality.

  4. ale70

    Apologies for not fully agreeing with you DJG but being an italian entrepeneur (small scale) I do not see the same things you see.
    – salaries are way too low compared to cost of living- dramatically TRUE
    – lack of minimum wage – NOT TRUE, over 90% of regular workers (I do not expect those hiring people “in nero” would anyway not apply the minimum wage, do you? ) are covered by the industry specific contracts setting minimum wages per level/seniority. That those industry wide contract are negotiated by not representative trade unions more focused on retirees is part of the problem and leads to too low levels of minimum wages and too formalistic rules;
    -no pregnancy leave???? that is NOT TRUE at all – up to six months of pregnancy leave with 80% of the salary, option for the new parent (highlight parent, it can be partially shared between mother and father/partner) to make it longer with 60% of the salary (most of it on the employer as a cost)
    – ratio of net income to employer cost is crazy: for somebody making 50K gross a year, it implies a net of no more than 30K and a company cost (due to social charges) of approx 70K…the highre the salary, the worse it becomes (in case of a 100K gross, net goes down to 55K and full cost up to 140/150)
    – lack of skilled job opportunities AND low net salaries put the pressure for younger ones to move abroad as apparently italy decided to compete with low cost manufacturing countries and not with core european countries;
    – excessive social charges (poorly used public spending?) means that companies steadily try to push salaries down (because the net/full cost ratio brings with it a lower spending power by local workers, so pressure on prices…I guess even if i am not an economist)

    in all this, the superbonus created a huge overspend with no goal by the client to negotiate the price (the more I pay, the more credit is left for me) so… good to move out of the pandemic, unsustainable in any economy in the longer term -at least that is my view

    1. DJG, Reality Czar


      Thanks for pointing out my mistake:
      We agree, more or less..
      –I wrote up the issue of the perils of pregnancy incorrectly. Too many Italian women are complaining that they face dismissal if they tell the office that they are pregnant. I’ve seen enough articles to note that this isn’t purely anecdotal. Yes, there is leave, but women worry about being demoted on return. LaStampa, in the pages on Torino and the region of Piemonte, recently drew attention to one such case of demotion on return. (The front pages of LaStampa, which serve the alta borghesia, don’t have the same concern for economic issues that affect working women.)
      On the other hand:
      –Yes, there are minimum wages by sector. But “regular workers” is a category that doesn’t cover the many precarious workers. Recently, there was a lawsuit against a contractor in Torino for UberEats. The wages paid riders were horrible (one euro an hour?). And don’t forget the constant grousing by restaurants and resorts about the lack of seasonal workers–till one discovers the hourly that these places offer. So a minimum-wage law is needed.
      –Also, isn’t Confindustria still trying to bargain for a minimum wage of 5 euros an hour? Hmmm.

      The structure of the Italian economy, with its strong sectors of small business, family-owned businesses, artisan shops, manufacturing, specialized manufacturing (jewelry, machine tools, shoes, clothes, many other products), and the network of local tabaccai and caffè is peculiar. Yet it has many strengths. I am not sure how many offices of McKinsey Italy needs–I’ll take the local Mac Bun “empire” instead,

      All in all, though, the big issue, placing much stress on all of Italian society, is low wages and a lack of job opportunities.

  5. Karl

    It looks like Meloni is going the way of Macron–race to the bottom — cutting safety nets and public expenditures. The rentier class rules there as in France and the U.S (e.g. Medicaid cuts coming). Austerity seems to be the order of the day for all but the PMC.

    We’ve heard “Red Lights Flashing for the Italian economy” for a while, yet Italy continues to limp along. It seems that whenever there’s a crisis there’s always another band aid. The next crisis I can foresee is Italy drowning from higher interest rates on its huge public debt. What to do? Borrow some more, of course.

    On the other hand, maybe this time is different?

  6. ale70

    I agree with you: overall real net salaries are ridicoulously low (funny I have to say that as an employer and confinudstria stil thinks we live in the 1950s) – UberEats is a case of itself like these companies all over the world, this not being an italian peculiarity. Local lack of compliance to rules and resources to make the rules respceted is in my view a major issue (e.g. what you mention about pregnancy leaves,and aboutvery small, often family run business) and it is traditionally countered by increasing fines/penalties to unrealistic levels – result is that compliance remains low as controls are very limited, given the penalties it could seem easier to find an agreement between controller and controlled, and in case those who are not following the rules tend to drag items for years in tribunals postponing everything.

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