Italy’s Recovery Plan Has Not Solved Its Old Economic Weaknesses
The European Commission’s latest recommendations show that, despite EU funds and fiscal reform, Italy’s structural problems remain strikingly similar to those it faced before the pandemic. A commentary by Marco Buti, and Marcello Messori
As is often the case, what appears urgent tends to displace what is important. The European Semester package published by the European Commission on June 3 confirmed this rule. Attention focused on the granting of further flexibility in fiscal rules to create additional borrowing space in response to energy-related challenges.
By contrast, the country-specific economic policy recommendations addressed to individual EU member states attracted little notice.
A close reading of the recommendations for Italy is instructive. The Commission acknowledges that some progress has been made. Yet despite access to almost €200bn under the Recovery and Resilience Facility, and despite the redesign of European fiscal rules to incentivise reforms and productive investment, time appears to have stood still for Italy.
A comparison between the EU recommendations addressed to Italy in 2019, the year before the pandemic shock and the launch of the RRF, and those issued for 2026 reveals a worrying degree of continuity.
Today’s problems look much like those of the past.
There is no need to rehearse the full list of Italy’s weaknesses identified by the Commission. It is enough to note that, since 2024, the public debt-to-GDP ratio has started to rise again and is expected to increase further over the next two years.
This trend is mainly due to the economy’s return to substantial stagnation. After the short post-pandemic rebound, Italy is once again recording some of the lowest growth rates in Europe. Poor demographic trends and meagre increases in average productivity have imposed tight constraints on the structural drivers of the Italian economy.
In light of this evidence, the question is what lies behind such a worrying picture and, above all, what initiatives are needed to mitigate and overcome it.
On the underlying causes, the Commission reiterates that employment gains in recent years have been insufficient to support Italian growth. They have failed to absorb the existing labour potential and, more importantly, have not favoured either efficient medium-sized and large firms or highly skilled human capital.
Employment has mainly increased in traditional, lower value-added services and in micro and small firms, which carry disproportionate weight in Italy’s productive system. On average, these firms struggle to adopt digital and artificial intelligence innovations and to reorganise work in ways that would raise productivity.
Moreover, in Italy the share of self-employment, often of low quality and used to circumvent market rules, has remained higher than the European average. Many medium-sized and large firms operating in mature sectors have also failed to adopt the innovative processes introduced elsewhere. The automotive sector, still tied to internal combustion engines, is a typical example.
As a result, negative pre-existing dynamics have reproduced themselves. The most qualified young people have continued to leave the country in large numbers, even though their share of total employment remains far below the European average.
The gaps between Italy and the rest of the EU remain negative for high-wage, high-productivity occupations and positive for low-wage, low-productivity jobs.
Faced with this picture, the resources of the RRF and the management of the national budget should have been used to design incentives for efficient small firms to scale up, reallocate public spending towards innovation, implement reforms to build institutions that support competition and firm selection, mobilise wealth to finance private investment and advanced services, invest in training and reskilling, reduce the tax burden on employees and increase it on the self-employed and rent recipients, and strengthen the welfare state to protect an ageing population and groups vulnerable to change.
Although some progress has been made in implementing the reforms envisaged by the National Recovery and Resilience Plan, in many areas Italy has instead adopted policies pointing in the opposite direction.
Italian choices have maintained a high and costly dependence on fossil fuels. They have incentivised micro and small firms indiscriminately, regardless of their propensity for organisational upgrading. They have preserved a distorted and complex tax system.
They have reduced the share of public spending devoted to education, healthcare and social inclusion. They have penalised patient institutional investors and innovative investors, thereby obstructing the development of the financial markets that are essential to technological innovation.
In its recommendations, the Commission defines the space for Italy’s post-recovery-plan economic policy agenda. Those who aspire to lead the country after the 2027 elections should tell Italians whether, and how, they intend to fill that space with concrete initiatives.
A version of this article appeared in Italian in Il Sole 24 Ore.
IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.
