Will Italy replace Germany as Europe’s economic powerhouse?

Image: Kay Nietfeld/dpa/picture alliance

While Germany’s economy is stalling, Italy is experiencing continued growth. The post-pandemic economic resurgence has little to do with PM Giorgia Meloni’s economic policies and everything with subsidies and new debt.

Mauro Congedo has been finding and renovating small architectural treasures with his brother and father for 25 years in Salento — a peninsula in the southeast of Italy that makes up the “heel” of the boot-shaped country.

The apartments and houses that Congedo restores in this rather remote region are now suddenly finding buyers from Germany and England.

“Things are going well again,” said the 50-year-old architect.

During the coronavirus pandemic, business almost came to a standstill. But what happened afterward in Italy’s industry was “crazy” he says, dragging out the “a” for a long time.

Congedo isn’t the only one enthusiastic about the economic recovery in Italy. 

Italy goes from problem child to head of the class

While governments in Rome were used to announcing depressing growth forecasts and poor debt rankings in the years before the pandemic, the country is now quickly becoming Europe’s growth engine.

In the last quarter, the Italian economy grew by 0.6%, while the German economy shrunk by 0.3% in the same period. Beyond this short three-month snapshot, other figures for Europe’s third-largest economy are impressive, too.

“The Italian economy has grown by 3.8% since 2019,” Jörg Krämer, chief economist at Commerzbank, told DW. That is “twice as much as the French economy and five times more than the German economy.” 

In Germany, the prospects are indeed looking bleak. The Organization for Economic Cooperation and Development (OECD) predicts growth of 0.3% this year for Germany. Leading German experts are only expecting growth of 0.1%. Italy’s economy, on the other hand, is expected to grow by 0.7% this year, according to the OECD.

The Italian stock market is also benefiting from the optimistic mood. The FTSE MIB benchmark index, which is made up of 40 big companies, rose by around 28% last year, more than any other European stock market indices. And  Italy is on track for more growth.

Italy’s growth based primarily on new debt

It didn’t always look so encouraging. Economists initially reacted very cautiously when Giorgia Meloni became prime minister in October 2022. During the election campaign, Meloni and her Brothers of Italy party announced a nationalist “Made in Italy” economic course, agitated against migrants and did not clearly distance themselves from Russia.

After her election, the German weekly Stern described Meloni as the “most dangerous woman in Europe.”

But in terms of economic policy, Meloni has so far largely remained on the same course as her predecessor Mario Draghi. This course is paying off for Italy, at least on the bond market. The interest rate at which the county borrows money is back to the level of before she took office.

At a press conference earlier this year, Meloni tried to take credit for the economic upswing. Above all, the lack of political stability in the past had slowed the economy she said, speaking from a position firmly in the saddle.

But how much of the growth is down to Meloni’s success?

“Not much,” said Krämer from Commerzbank. “The strong growth can be explained by Italy’s loose fiscal policy.”

That means Italy’s growth is based primarily on new debt. While the Italian state’s new debt before COVID-19 was 1.5% of gross domestic product (GDP), it has shot up in recent years and was 8.3% of GDP in the first half of 2023.

The country’s overall mountain of debt is growing, too. In January, the EU Commission estimated that it would exceed 140% of GDP this year and continue to rise in 2025. For comparison, in Germany the debt ratio is 66%, in France it is almost 100%.

Courtesy of DW