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Country summary





Government type



58,126,212 (July 2010 est.)[1]

Population growth %

-0.05 (2010 est.)[1]

Life expectancy

80.2 years[1]


7.7% (2009 est.)[1]

Index of Economic Freedom


Corruption Perceptions Index


Doing Business ranking



Economical characteristics

  • Currency: Euro (ISO code: EUR)
  • Central bank discount rate: 3% (31 December 2008)[1]
  • Commercial banks lending rate: 11.34% (31 December 2008)[1]
  • is part of the Eurozone

Notable events:


GDP (million USD)[7] 1 200 820 1 097 340 1 117 360 1 218 920 1 507 170 1 727 750 1 777 740 1 863 480 2 114 470 2 303 080
Govt. debt (% of GDP)[8] 124.544 119.389 118.521 115.771 111.353 111.128 112.576 108.443 103.933 106.321
Govt. revenue (% of GDP)[9] 39.125 37.159 36.867 36.183 36.167 35.675 35.356 36.889 37.601 37.490
Govt. expenses (% of GDP)[10] 40.449 39.176 39.913 39.254 39.518 38.659 39.169 39.599 39.365 40.142
Debt to revenue (years) 3.183 3.213 3.215 3.200 3.079 3.115 3.184 2.940 2.764 2.836

Economic history

The Italian Miracle after WWII

From 1946 to 1962 the Italian economy grew at an average annual rate of 7.7 percent, a brilliant performance that continued almost until the end of the ’60s (the average growth over the whole decade was 5 percent). The so-called Miracolo Economico turned Italy into a modern and dynamic society, boasting firms able to compete on a global scale in any sector, from washing machines and refrigerators to precision mechanical components, from the food sector to the film industry.

The period 1956 to 1965 saw remarkable industrial growth in Western Germany (70 percent in the decade), France (58 percent), and the United States (46 percent), but all were dwarfed by Italy’s spectacular performance (102 percent). Major firms, such as the auto-maker Fiat; the typewriter, printer, and computer manufacturer Olivetti; and the energy companies Eni and Edison, among others, cooperated with an enormous mass of small firms, many managed by families, in accordance with the traditionally strong role of the family in Italian society. At least one-fift h of a population of fifty million moved from the poor, arid south to the rich, industrialized north, changing their way of life, buying cars and television sets, mastering standard Italian, enrolling their children in schools, saving money to buy houses and to help relatives still living in their old villages. After 1960, rapidly rising living standards, as well as growing business and job opportunities, brought about an end to the flows of Italians to the rest of Europe and the Americas, ending that Italian diaspora that had driven almost twenty million people to leave their homeland in less than a century.

In the very first years aft er the Second World War, a group of liberal market-oriented economists and politicians attained key positions in government, swept away Fascist legislation, and instituted democratic politics and free-market reforms. A central figure was the anti-Fascist journalist and economist Luigi Einaudi, one of the most prominent Italian classical liberals, who returned to Italy and served after the war as Governor of the Central Bank, then Minister of Finance, and finally President of the Republic; he greatly influenced the economic policies implemented by Prime Minister Alcide De Gasperi (1945–1953) and, after De Gasperi’s death, by his successor Giuseppe Pella, and others. The context they operated in could be hardly considered an easy one. Italy was a poor country that had been devastated by Fascist collectivism and war; most of the population was both unemployed and uneducated; infrastructure was absent or very poor; a powerful Communist Party threatened to replace Fascist collectivism with Communist collectivism; and state-controlled companies dominated much of the economy.

A careful monetary policy curbed inflation for at least twenty years (in 1959 the Financial Times celebrated the lira as the most stable Western currency); free-trade agreements helped Italy to re-enter the international market; a fiscal reform (the Vanoni Act, named for the minister who designed it) cut tax rates and simplified the tax collection system. In an era dominated by Keynesian ideas and easy spending, Italian public expenditure remained relatively controlled: in 1960 public expenditure barely reached the level of 1937 (30 percent of GDP, with a significant share of fixed-capital investments), whereas in other European countries it had risen dramatically.[11]

From wealth to ruin

Rising prosperity seemed the perfect occasion for new government expenditures and interventions. As early as the 1950s the Italian government established Cassa del Mezzogiorno (similar to Roosevelt’s Tennessee Valley Authority, but in poor southern Italy). In the 1960s Italian governments passed legislation aimed at redistributing wealth, expanding government control of the economy (e.g., the nationalization of electric supply), and establishing a stronger welfare state.

In relatively prosperous Italy, redistributionist movements gained broad popular support. In 1962, during important negotiations on job contracts for metal workers, unions asked for shorter hours, more vacation, and more power to organize union activities in factories. Partito Socialista Italiano joined the ruling coalition with the Christian Democrats and the first "center-left government" was formed. In 1963, a public housing program undertaken through the nationalization of land aroused strong opposition from entrepreneurs’ associations and private owners (among them the Catholic Church), which convinced Democrazia Cristiana to abandon the idea, but such collectivist causes dominated the rest of the decade and the 1970s.

Several important public policies adopted in that period laid the foundations for Italy’s current crisis. The first was a weakening of fiscal discipline, due to a 1966 Constitutional Court decision that loosely interpreted the constitutional balanced budget constraint; that suspension of constitutional limits allowed the Parliament to pass laws for which annual expenses were covered not by fiscal income (taxation), but by the issue of Treasury bonds. That decision tore a leak in the public budget that grew larger every year. Until the early 1960s the "primary deficit," which is calculated by deducting interest payments from the total budget deficit, was almost zero; it rose quickly after the Court’s decision and accelerated after 1972, when deficit spending became a systematic policy strategy. In 1975 the primary deficit had already reached a dangerous 7.8 percent of GDP.

The second was the introduction of a generous pension system in 1969 (the Brodolini Act). The previous contribution-based mechanism was replaced with a redistributive system, according to which retirees received pensions that were not determined by the total amount of compulsory savings collected during their working years, but merely by their previous wages. A "social pension" for every citizen was established, along with a seniority criterion for pensions, thus allowing workers to retire early and a lax approach was adopted to awarding disability pensions in southern Italy, which was considered a surrogate for more effective pro-growth policies. Few paid any attention to the issue of financial sustainability. Afterall, the voters of the future do not vote today.

The third was heavier regulation of labor markets through the adoption in 1970 of the so-called Workers’ Statute, including Article 18, which stipulates that if a court finds unjust the dismissal of an employee of a firm that employs more than fifteen employees with long-term fixed contracts, then the employee has the right to be reinstated. The burden of proof rests entirely on the employer. By making it very costly to dismiss employees, the law at the same time made it very costly to hire employees, which both reduced workplace mobility and encouraged illegal work.

The fourth established, through successive acts between 1968 and 1978, a nationalized health care system that was almost fully financed by taxes, meaning that there was little incentive for consumers to economize on use of medical services.

Finally, in January 1970, the government imposed a compulsory rule for all employees in the engineering and metal sectors, which substantially regulated and limited working times.

The long-run negative effects of those and other policies were obscured in the short run by Italy’s still strong growth and by the low average age of the population. Generous pensions and health care expenses for small numbers of retired people were paid by large numbers of young workers. Year after year those policies, along with ever-heavier regulation of the labor and services markets, reduced productivity, made the labor market more rigid, dramatically raised the costs of hiring, and promoted ever-greater public expenditures and the accumulation of state debt, which in turn absorbed an ever-greater share of private saving.

Over time an aging population reduced the ratio between the working population and the retired population, making pension and health care systems more demanding and less sustainable. During the 1960s and the 1970s all European countries enlarged their public expenditures, but Italy literally went out of control. Public spending rose from 32.7 percent of GDP in 1970 to 56.3 percent in 1993, spurred on in part by a reckless policy of hiring more civil servants to make up for the lack of private jobs, especially in the south. While public debt had been stable at an average 30 percent of GDP during the 1950s and 1960s, it reached the astonishing total of 121.8 percent in 1994.

Thus ended the Italian miracle. Average GDP growth rate was still 3.2 percent in the 1970s, but it fell to 2.2 percent in the 1980s. Thanks to systematic devaluation of the lira, Italian firms could maintain their international competitiveness for a while , but high inflation and public debt were clearly jeopardizing the future. Various attempts at reform were made in the 1990s, especially after the financial and political crisis of 1992–1993, when the country risked a sovereign default and the post-war political system was swept away by corruption charges. Some privatizations of state-owned industries helped to lower public debt to a slightly more viable level. Minor changes were made to the pension system and in 1997 the Italian parliament passed legislation to modernize labor laws, but the political obstacles to abolishing Article 18’s provisions (regarding the right to reinstatement of laid-off employees) led to the establishment of a cumbersome two-tier market, including both hyper-regulated and rigid old-style contracts, as well as flexible new fixed-term contracts. Those reforms provided some fuel to an exhausted engine and postponed for a while the reckoning. The run, however, was over.[11]

Italy in the European crisis

According to International Monetary Fund projections, Italy's headline debt will reach 120 percent of national output in 2011, and then decline only slightly to 118 percent by the end of 2016. As of July, 2011, Italian bonds yielded about 4.9 percent, with the spread over German bonds widening to about two full percentage points (in contrast, the Greek-German spread is now about 13 percentage points). Further increases in interest rates could push the forecasts for Italy's debt toward Greek levels.

Bailing out makes sense for smaller countries like Greece. It has about 360 billion euros in debt outstanding and the potential credit losses in any restructuring are in the range of 100 billion to 200 billion euros. The amounts are small relative to the EU's 12 trillion-euro economy.

Italy, though, has close to 2 trillion euros in debt outstanding. It's inconceivable that Germany or the IMF could provide a rescue to protect its creditors. Such a package would have to involve loans and guarantees of at least 500 billion, and possibly 1 trillion, euros to impress the markets. This would be a significant fraction of Germany's gross domestic product of about 2.5 trillion euros. With a debt-to-GDP ratio of about 80 percent, Germany's ability to take on new debt is limited.



Italian banks will be able to draw on substantial credit from the European Central Bank, especially once Mario Draghi, former head of the Bank of Italy, becomes the ECB president in November, 2011. But the entire euro system -- the ECB plus the 17 central banks sharing the euro -- has a combined balance sheet of only about 1.9 trillion euros. It's unlikely that ECB credit can do more than postpone sovereign-debt problems on an Italian scale.[12]

The price of insuring Italian sovereign bonds against default risk has soared 11% since the weekend, when the European Union finally gave Greece the cash to make its July debt payments. Standard & Poor's warned that Greece could technically be considered in default. Faced with such a scenario, traders have already turned a cold eye to the other fragile economies of the euro zone: Portugal, Spain, Italy. The cost of insuring Spanish and Portuguese bonds surged 3% as of July, 2011, and credit default swap spreads on Italian debt, which was previously seen as relatively insulated, soared a full 6.7%.[13]

European banks have total claims and potential exposures of $998.7 billion to Italy, more than six times the $162.4 billion exposure they have to Greece, according to Barclays Capital. European banks have $774 billion of exposure to Spain and $532 billion of exposure to Ireland.

In the United States, banks are also more exposed to Italy than to any other euro zone country, to the tune of $269 billion, according to Barclays. American banks’ next biggest exposure is to Spain, with total claims estimated at $179 billion.[14]



  1. 1.0 1.1 1.2 1.3 1.4 1.5 1.6 CIA - The World Factbook. "Italy", from The World Factbook. Referenced 2010-09-21.
  2. Heritage Foundation. "Italy", Economic Freedom Score. A lower ranking is better; but please be careful when comparing between different countries or years. Referenced 2010-09-21.
  3. Transparency International. "Italy", Corruption Perceptions Index 2009. A lower ranking is better; but please note that the numbers cannot be compared between countries or years due to different methodology. Referenced 2010-09-21.
  4. Doing Business. "Italy", Doing Business 2010 (part of The World Bank Group). A lower ranking is better; but please be careful when comparing between different countries or years. Referenced 2010-09-21.
  5. Carmen M. Reinhart and Kenneth S. Rogoff. "This Time is Different", Princeton University Press, ISBN 978-0-691-14216-6, p. 368-369. (The list does not claim to be complete.) Referenced 2011-07-20.
  6. Carmen M. Reinhart. "This Time is Different Chartbook: Country Histories on Debt, Default, and Financial Crises" (pdf), March 3, 2010, p. 66. (The list does not claim to be complete.) Referenced 2011-07-20.
  7. World Bank. "Italy: GDP", from World Bank Data. Referenced 2010-09-21.
  8. World Bank. "Italy: government debt", from World Bank Data. Referenced 2010-09-21.
  9. World Bank. "Italy: government revenue", from World Bank Data. Referenced 2010-09-21.
  10. World Bank. "Italy: government expenses", from World Bank Data. Referenced 2010-09-21.
  11. 11.0 11.1 Tom G. Palmer. "After the Welfare State" (pdf). "How the Welfare State Sank the Italian Dream" by Piercamillo Falasca, p. 15-20. Referenced 2013-01-15.
  12. Simon Johnson. "Could Italy Be the Next European Domino?", San Francisco Chronicle, The Chronicle with Bloomberg, July 4, 2011. Referenced 2011-07-12.
  13. Emerging Money. "Italian, Spanish banks sink in euro credit market storm", posted 7/5/2011. Referenced 2011-07-12.
  14. Liz Alderman and Rachel Donadio. "Debt Contagion Threatens Italy", New York Times, Published: July 11, 2011. Referenced 2011-07-19.