Italy’s next leaders face grim outlook as Draghi stint nears end

Bloomberg

The winners of Italy’s September 25 election will take charge of an economy still warm from a summer boom, but with darkening prospects.
High debt, an inflation shock, weak growth, an aging population and stubborn North-South disparities may greet the center-right coalition led by Brothers of Italy Leader Giorgia Meloni. Opinion polls before a blackout period showed her alliance with the most support.
The bloc, which includes Matteo Salvini’s anti-immigrant League and former Premier Silvio Berlusconi’s Forza Italia, has pledged to keep the economy on track and public finances sound.
Statements about greater state intervention and a history of defiance toward the European Union by coalition members such as Salvini have left investors edgy however.
For the past 30 years, political leaders have struggled to manage Italy’s mammoth borrowings. Most recently, government measures to protect the economy from the pandemic brought debt-to-GDP close to levels last seen in the aftermath of World War I.
Prime Minister Mario Draghi succeeded in putting that onto a descending path, helped by inflation and a better-than-expected economic recovery. Any successor faces the challenge of holding to that debt trajectory just as the energy crunch caused by Russia’s invasion of Ukraine intensifies.
The best way to overcome debt is through growth, but that is where Italy has really struggled. Post-pandemic tourism and EU support helped the economy to recently outperform other large euro-zone countries, but such momentum is unlikely to last.
Inflation — currently at 8.4% — is also a problem. While eroding debt, it has hurt the finances of ordinary Italians, stoking discontent that center-right politicians have exploited. Interest-rate hikes to bring consumer prices under control will also increase the cost of government borrowing.
Adding to the growth challenge is the country’s shrinking population. The United Nations estimates that the number of Italians will decline to around 37 million by 2100 from almost 60 million currently. That might be even worse without migration, which center-right candidates want to limit.
The demographic problem is another pressure on public finances. An aging population means fewer young people in employment supporting the pensions of a growing number of retirees.
Ultimately “people will need to work until later in life and greater productivity will be needed with investments in innovation and other areas,” Bank of Italy Governor Ignazio Visco said.
One perennial structural problem is the country’s economic divide, stoking political and fiscal tensions.
The North, particularly the Lombardy region around Milan, consistently produces the largest share of output, while the South depends on financial support.
A spending splurge by the EU’s Recovery Fund aims to address that disparity. Italy is the biggest beneficiary, with almost 200 billion euros ($202 billion) coming its way. About 40% of the cash is aimed at boosting the southern economy, notably on infrastructure, health, education, green and digital projects. Failure to meet relevant deadlines could hamper its biggest chance for renewal.