Has Italy’s economy turned the corner?

Investors have long despaired of Italy, says Miles Johnson in the Financial Times. The economy has barely grown since 2000. “Anyone who purchased Italian equities at the start of 1999… has lost a fifth of their investment.” But now things are looking up under prime minister Mario Draghi’s unity government.

Italy’s government debt-to-GDP ratio of 155% is the second-highest in Europe, behind only Greece. For now, massive bond buying by the European Central Bank (ECB) is keeping borrowing costs low: at 0.85% Italy’s ten-year government bond yield is barely higher than the UK’s. But a brief spike in the gap with German bond yields earlier this month was a reminder that Italian debt is underpinned by the ECB’s stimulus. To solve its debt problems Italy needs growth.

Reform in Rome

Draghi’s government is shaking up Italy’s sluggish bureaucracy and courts, says Anna Momigliano in Foreign Policy. “By far the slowest in the European Union… civil proceedings can often last up to seven years,” which scares away international investors. The government is giving extra resources to the overwhelmed judiciary to help clear a backlog of cases and is imposing a new timetable to accelerate legal processes. Rome will receive the biggest slice of the EU’s pandemic recovery fund over the next five years: €191.5bn. Spending priorities include insulating buildings and rolling out new digital and rail infrastructure. That money should provide a steady tailwind for the economy. Italy’s FTSE MIB index has returned 23% so far this year, more than double the FTSE 100’s performance over the same period.

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A country that has had seven prime ministers in the past decade is enjoying a rare moment of political calm, says Tom Rees in The Daily Telegraph. But another storm may not be far away. The Italian president’s term ends next February and Draghi is tipped to replace him. That could lead to early elections the far right is well placed to win. Investors have long feared that outcome, but Italy’s right is not the threat to the euro that it once was after toning down its criticisms of Brussels in recent years.

A key concern is that a new government could unpick Draghi’s reforms, says Nick Andrews of Gavekal Research. Yet Brussels has a “trump card… it can pull the plug on recovery fund transfers”. That should encourage Italian politicians to keep reforms on track. Italy’s debt woes date back to the 1980s, a period marked by excessive spending and overmighty trade unions.

Rome has done a better job at balancing the books since it joined the euro, but a lack of growth has kept debt levels high. Turning around the economy is a formidable task, but for “the first time in decades Italy does look to be headed the right way”.