Over and above the shortage of banking resources, their allocation in the post-crisis period has not been efficient. A Bank of Italy study (Schivardi et al, 2017)[10] examined how, in order to address tighter prudential standards, banks with low capital (primarily the regional banks) have sought to avoid materializing losses by extending credit to so-called ‘zombie’ firms (those whose return on equity stands below their cost of capital). According to the authors, such a misallocation has caused credit restrictions to healthy borrowers and higher probability for them to default.
Labour: a scarce and undervalued resource
Changes in the labour factor in Italy have also contributed to the deterioration of the potential growth rate, despite the reforms of the 1990s and 2010 (including the Jobs Act)[11]. Average annual growth in hours worked, which was still positive in the 2000s (at 0.3%), has fallen to zero, and its contribution to potential growth became negative from 2014 on (Chart 4). The reforms helped drive the growth in jobs, but ignored training and education policies. At 22%, the share of people aged 25 to 34 with a university degree is 7 points below the EU average. Moreover, Italy ranks poorly in terms of professional training and adult skill levels (OECD, 2019[12]).
The proportion of the long-term unemployed has remained high and stable, at 60% of the total in 2018, as has structural unemployment. At 10.2% of the active population (European Commission figure), this remains one of the highest rates in the OECD; more importantly, it has not fallen, whilst Spain, Portugal and France have all seen progress in this area recently.
Lastly, the population is ageing (nearly one Italian in four is aged 65 or over, making Italy the second oldest country in the world, after Japan) and the working-age population is shrinking. In addition, Italy’s activity rate of 67%, although rising, is one of the lowest in the euro zone (it is 81% in Germany for instance)[13]. Another unwelcome record is that 29% of young Italians (20 to 34 years old) are neither in employment nor in education or training (NEETs, Eurostat), compared to an EU average of 17%[14]; 50,000 young people leave the country every year.
Has the output gap already closed?
The downtrend in the potential growth rate could mean that although it is now seeing a delayed and modest recovery, the Italian economy is already facing capacity constraints. This would appear to be the European Commission’s analysis, when it indicates that the output gap (the difference between GDP and its potential level) narrowed in 2018 (Chart 5).