Investors can find good opportunities in Italy – despite its economic reputation.

Political instability doesn't translate into economic instability.

Italy remains the third-largest exporter in Europe and seventh globally.

When Italy steps into the spotlight, it often does so for the wrong reasons. At the beginning of 2019, The New York Times had this headline about the Italian economy: "Italy slides into recession, stoking global fears."

Fortunately, in the following quarters, it turned out earlier recession fears were overstated. Now, it appears that in the last two years or so, the Italian economy has merely been stagnating. Yet, in a more recent piece, The Economist ran the title: “Italy is out of recession, but for how long?” – adding “Out of the frying pan” as a header, making their meaning quite clear.

A vanished nest egg

The inability of the Italian economy to grow at decent rates is not novel. Since the adoption of the euro and the entry of China in the WTO, Italy's growth came down to a meagre 0.1% per year, which compares to +1.4% for the euro area (Italy excluded; our calculation from Eurostat data).

The comparison with Spain – an economy similar to Italy – is particularly striking. As shown in the graph below, GDP net of inflation in Spain is now 50% higher than in 2008, while Italy’s GDP is still posting a disappointing -5% compared to pre-crisis levels.

Spain - Quarterly GDP net of inflation since 2008 Image: Trading Economics

Italy - Quarterly GDP net of inflation since 2008 Image: Trading Economics

In turn, the disappearance of growth implies other unpleasant budgetary and social features. As to public finance, data clearly testify the inability of Italy’s governments - there have been 63 of them since 1948, slightly less than one per year – to draw down the country’s huge stock of public debt, running at 135% of GDP, which unavoidably results in high tax rates and reduced public services. Low growth in the economy also leads to unusually high numbers of business bankruptcies, greater shares of non-performing loans and a sluggish housing market whose prices have never recovered since their lows of late 2013. Furthermore, Italy’s economic slowdown is taking place in a country in demographic decline with sinking birth rates and a growing brain drain of young people escaping underemployment. In the meantime, the country continues to be divided between economically desertified southern regions and the productive northern regions (Lombardy, Veneto, Emilia-Romagna, Piedmont) that create jobs and growth but not enough to benefit everybody in the rest of the country.

Italy is actually better than you think

Still, when observed with the attention often used by foreign investors, Italy is not doomed – and it's actually much better off than one might think.

Yes, Italy’s governments change frequently. But a system of checks and balances gives the President of the Republic powers to guarantee the required stability at the national and international level, even when the Prime Minister is supported by weak governments. And so political instability does not automatically translate into instability of the economic policies actually being put in place. It's often forgotten that Italy has continued to honor its (high) debt payments, even at times when debt spread was skyrocketing. And more recently, even the ex-ante revolutionary Yellow-Green coalition of the League and the Five Star Movement ended up approving a 2019 budget law, entailing a deficit just over 2% – a number in line with the expectations of the European Commission and markets. The new government that came into power over the summer continued along similar lines.

Seen from outside, it looks like instability, but instead it should be read as "resilience."

True, industry has stopped growing in the aggregate. And, indeed, the 2008-09 recession hit harder in Italy than in Spain. Spain did less badly during the Great Recession because consumers stopped buying the Italian high-end luxury products during the downturn, while they largely continued buying the much cheaper Camper shoes or Zara clothing from Spain. Yet, while deindustrialization is common in many advanced countries, many segments of the Made in Italy are still vital – from furniture design to micromechanics, not to mention tourism. (Italy is the fifth most visited country, just behind China.) The data indicate Italy’s exports are well above 500 billion euros while its trade surplus will stay close to 3% of its GDP. In fact, Italy remains the third-largest exporter in Europe after Germany and France, and seventh in the world after China, the United States, Germany, Japan, the Republic of Korea and France. In a world increasingly flat, Italian producers appear to be endowed with special features, and so are less pressured to look abroad for cheaper labour costs to withstand competition from East Asia. And those firms that can take advantage of being different may gain easier access to distant markets than in the past.

Finally, Italy’s firms are disproportionately small and small is not beautiful any more – certainly less than it used to be before the Internet revolution. Yet the data from the 2014-18 Italian recovery confirm Italian firms of all sizes managed to grow. This is good for a country whose productive structure is still disproportionately tilted towards SMEs. The small, often family-based firms that adapt to change by replacing old, self-taught managerial methods with more modern ones proved to be more successful than others, showing better results in terms of cash flow and returns on equity. Family managers are pushing Italian small companies to learn the importance of opening up their capital beyond the family, and in some cases going public. While the sinking of Bari’s biggest local bank under a heavy debt burden received a lot of attention, the Intesa San Paolo report on Italy’s districts reported on the enduring success of Bari’s mechatronic industry. Milan-Cortina will host the 2026 Winter Olympics, spurring further investments in an area that remains the most productive in Europe after Baden-Wurttemberg, Rhone-Alpes and Bavaria. With its 100-plus universities and research institutions, some of which are European pieces of excellence, the country is equipping its younger generation with the skills required to face the fourth industrial revolution.

What's the World Economic Forum doing about tax? The World Economic Forum has published its Davos Manifesto 2020, calling on business leaders to sign up to a series of ethical principles, including: "A company serves society at large through its activities, supports the communities in which it works, and pays its fair share of taxes."

Additionally, the Forum’s Trade and Global Economic Interdependence Platform provides a vital link between trade and tax communities to enable coherent policymaking which responds to societal needs and reflects business realities. Taking its lead from OECD-led reforms, the work brings technical issues to a high-level audience and enables honest dialogue among diverse stakeholders on polarizing topics. You can find relevant publications here.

Italy is a buy, not a sell