Once known for its economic dynamism, the Italian economy has visibly lost ground since the beginning of the 1990s. Its dismal growth performance vis-à-vis major industrial countries has finally turned any remaining trace of the post-war economic miracle into a distant memory. For more than a decade the average annual rate of real GDP growth has been at around 1.5%, half a percentage point below the euro area average. Italy also lags behind in terms of per capita economic growth.

This Country Focus examines Italy’s growth malaise, showing that it does not result from sluggish employment growth or feeble investment activity. In fact, the slowdown went along with a significant revival of the labour market in the second half of the 1990s and a sound accumulation of capital. However, an adverse combination of structural obstacles such as low competitive pressure, low human capital and R&D expenditure, and fiscal adjustment skewed towards higher taxes and lower public investment has curbed overall factor productivity. 

A series of structural reforms launched in the 1990s aimed at addressing the structural weaknesses of the Italian economy has so far not produced the desired effects, because reforms have not yet gone far enough. In particular, the persisting regional gap characterised by large underutilised recourses in the lagging South continues to act as a major drag on the economic performance of Italy as a whole.