Italy is stuck in a “thick quicksand” of economic problems that will persist regardless of the result of the constitutional reform referendum taking place on December 4.
Almost all international attention being trained on Italy and Prime Minister Matteo Renzi currently is focused on the referendum.
As its stands, the “no” vote appears to have a sizeable lead, with polls showing the status quo holding a lead of roughly six points over Prime Minister Renzi’s proposed reforms.
A significant chunk of Italians — more than 20% — are still undecided, so the outcome is far from certain. If “no” wins, it is highly likely that Renzi will fall on his sword and resign.
However, this isn’t the only major issue facing the country, with a team of Morgan Stanley staff including Daniele Antonucci noting that Italy faces a litany of other problems including consistently sluggish economic growth, a weak “economic fabric” and a whole heap of structural issues that are holding the country back.
Italy has crushingly low productivity, a history of missing growth targets, and has generally underperformed the rest of Europe in recent years.
These issues represent a much bigger challenge to Italy than the instant impact that the referendum will have.
Here are some of the key points made by Antonucci as part of Morgan Stanley’s 2017 European Economic Outlook, circulated to clients on Sunday (emphasis ours):
“The Italian economy is ‘stuck in the mud’. It’s a thick quicksand of structural problems stifling growth and productivity. We expect GDP to underperform the other large eurozone countries,and set a high bar to change our bearish medium-term view.”
“The economic fabric is vulnerable too, with structural problems such as a high stock of government debt, a fragile banking system and inefficient public administration and civil justice. Some reforms have happened, e.g., of the labour market, and are likely to continue to happen. But they’re unlikely to reach ‘critical mass’ regardless of whether political risk rises or falls.”
None of this is new, Antonucci adds. Italy’s major economic and structural issues have persisted for almost two decades:
Another way of saying all this is that Italy’s economic underperformance isn’t just about a short period of cyclical weakness. It’s much more than that. It’s about very low potential output. This isn’t new. Rather, it’s been going on for nearly 20 years. We believe that the growth potential is about 0.5%Y currently, one of the lowest in the developed world. By its very nature, this problem is unlikely to change any time soon.
While these issues are broadly more important than the referendum’s immediate impacts on Italy, the vote could substantially help or hinder change for the better in the country.
“A process of reform had started with the economic policies of Renzinomics, but it hasn’t yet gone very far and, depending on the political situation, may even come to a standstill for a while,” Antonucci writes. Should “no” prevail and Renzi resign, the pace of change in Italy could stagnate, further embedding the issues holding Italy back.