Italy’s Slow Recovery and the Millions Left Behind

The 2008 crisis is still haunting Europe.

For millions of Italians, the country’s economic recovery is still little more than a dissonant newspaper headline at odds with their day-to-day reality. New figures released by the Italian National Institute of Statistics last week showed that by the end of 2017, 8.4 percent of Italians and 6.9 percent of all Italian households were living in “absolute poverty” – defined as being unable to purchase a basket of basic goods and services. This is up from 7.9 percent of Italians and 6.3 percent of Italian households a year earlier. Meanwhile, the share of Italians living in “relative poverty” – defined as having a disposable income of less than half the national average – climbed to 15.6 percent of the population, or an estimated 9.4 million people. This is up from around 14 percent in 2016. The release of alarming news about poverty in Italy has become something of an annual tradition in the country since the financial crisis. The number of impoverished Italians has tripled since 2008, and the downward slide has been steady.      

Curiously, however, life is getting worse for many Italians despite that fact that on a macro level, the country’s economic recovery has continued to slowly gain traction since putting a double-dip recession behind it in 2014. Italy’s gross domestic product grew 1.5 percent in 2017 – the economy’s best performance since 2010. As a result, unemployment has continued to tick downward, from a peak of around 13 percent to 10.9 percent today. According to figures released late last year, average family income was actually up by 1.8 percent to 29,988 euros (roughly $35,000) per year, and purchasing power was up by 1.7 percent last year compared to two years earlier. Median income rose 2.8 percent in the same period.

All this, of course, creates some cause for optimism on the poverty front. Economic recoveries, though, never happen evenly; the poorest segments of society are generally the last to enjoy the gains. (According to the National Institute of Statistics, wage and employment gains have been concentrated in the top fifth of Italian society.) Moreover, Italy has been making some progress on issues threatening to drag the economy backward. The country had been wheezing under the weight of nonperforming loans, for example. But the stock of NPLs in banks’ balance sheets has been declining ever so gradually – down 20 percent from its peak – since the government implemented a slew of measures to revive the banking sector, and the NPL ratio has now dropped below pre-crisis levels.

However, Italy’s economy is still among the worst performers in Europe and smaller than it was in 2008. The level of NPLs is still quite high – about 14.5 percent of total loans – limiting lending and investment across the economy. Italy also still has the highest debt of all EU members – about $2.8 trillion in 2017, or more than 130 percent of GDP. Moreover, its recovery may be running out of runway. Exports have been a major driver of Italy’s return to growth, for example, meaning a broader economic downturn in Europe or the U.S. would take the wind out of Italy’s sails prematurely. As it stands, the Organization for Economic Cooperation and Development projects growth to continue roughly at this rate through this year, before decelerating in 2019 to around 1.1 percent due to plateauing job growth, private investment and domestic consumer spending.

Slowly rising consumer price inflation may also weigh on growth over the next few years. This speaks to one of many paradoxes inherent to uneven recoveries – and one that may contribute to the rise in poverty rates. Inflation in Italy is still relatively tepid, with monthly figures consistently below the European Central Bank’s target of 2 percent. Nonetheless, goods are becoming more expensive at a time when those being left behind can scarcely afford it. Meanwhile, some of the structural reforms that have been deemed necessary to unleash the recovery (social spending cuts, for example) are likewise leaving the poor at least temporarily in the lurch, all while the country’s elites are doing quite well. This year, the poor didn’t even have a World Cup team to distract from the daily grind.

It should be no surprise, then, that Italian voters have ushered in a populist government, even though the recovery was seeming to pick up steam. Indeed, the new figures on poverty put Italy’s age-old regional disparities in even starker relief. Suffering is most acute in the southern regions that, in March’s general elections, voted overwhelmingly for the Five Star Movement – the euroskeptic and staunchly anti-immigrant bloc that formed a right-wing coalition government with the northern-based League party in late May. According to official figures, 11.4 percent of Italians in the south (including Sicily and Sardinia) are living in absolute poverty, up from 9.8 percent in 2016. By comparison, just around 7 percent of Italians in the north fall into this category, up by 0.3 percent from the previous year. (Poverty rates actually declined in central Italy in 2017, from 7.3 percent to 6.4 percent.) Similarly, poverty rates were higher among Italians below the age of 35 (9.6. percent) than any other age group, and youth unemployment remains above 30 percent. As could be expected, both the League and the Five Star Movement performed particularly well among 18-34-year-olds.

This trend, of course, reflects one seen across Europe and the U.S. since 2008, where recoveries haven’t uniformly healed the wounds inflicted by the crisis – and where the recovery has been felt the least in segments whose living standards were hit disproportionately hard. In Italy, as in many other countries, the employment problems generated by free trade and widening inequality have expressed themselves as hostility toward immigration. When a class is hit by uncontrollable economic forces, the fear of unemployment or surplus labor is immense. (Notably, poverty is highest among immigrants in Italy, which has taken in more than 600,000 migrants since 2014. More than 29 percent of households consisting exclusively of non-nationals are living in absolute poverty, compared to just more than 5 percent for households made up solely of Italian nationals.) And when a political movement gains steam with immigration and resentment of outside institutions as the fuel, its implications are more likely to ripple beyond borders to the point where, in Europe, it’s begun undermining the very foundations of the EU project.

Thus, from a geopolitical perspective, Italy illustrates just how much fixating on economic recoveries misses the point. The crisis exposed and deepened social divisions, and higher growth is proving not to be a panacea. The consequences of 2008 are still becoming fully apparent, and establishment parties may not have the luxury of merely waiting out the political forces they’ve unleashed.

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