Rebooting Italy after Brexit

Much of the economic focus in Europe is currently on the United Kingdom and the fallout from the Brexit referendum. Indeed, yet another economic forecast—this time a survey by FocusEconomics—now sees real GDP growth in the U.K. at 1.4 per cent this year down 0.5 percentage points from the pre-Brexit estimate as a result of weak business sentiment and uncertainty.

Interestingly enough, there’s another European referendum coming that may have important economic implications for it ultimately will be a vote on Italian Prime Minister Matteo Renzi’s economic policies governing the Eurozone’s third largest economy.

While the referendum is actually about reducing the powers of the Italian Senate as well as the number of members in Italy’s two-chamber parliament, it’s more than a simple vote on institutional reform. Following in the footsteps of David Cameron, Renzi has decided to make this referendum a judgment of his role in reforming Italy by promising to resign if he loses the vote.

Renzi has acquired the nickname of “Il Rottamatore,” which translates into the dismantler or demolition man. Elected on the promise of widespread reform to tackle Italy’s poor economic performance, he has attempted to shake up Italy’s economy by pushing a Jobs Act through parliament to make it easier for companies to hire and dismiss workers as well as moving to reduce taxes. His government is also attempting to rein in public spending and sell off state-owned assets to shrink the public debt.

After two years, what are the results?

Statistics from the International Monetary Fund World Economic Outlook Database suggest that the Italian economic freefall has been halted since Renzi’s election in 2014. Real GDP shrank each year between 2012 and 2014 but actually rose by nearly one per cent in 2015 and is projected to grow by a similar amount in 2016.

After reaching a peak of 12.6 per cent in 2014, the unemployment rate is forecast to decline to 11.4 per cent in 2016 while total employment has been growing since 2013. As for the public finances, general government net debt as a per cent of GDP has stopped growing and is expected to decline slightly from 113 per cent in 2014 to a forecast of 112 per cent in 2016. Total government expenditure as a share of GDP has also levelled off at about 50 per cent.

After only two years, it would appear that Renzi’s government policies have coincided with a slow turn-around of Italy’s economy. Nevertheless, it may be too early to conclude that Italy has embarked on a new era of robust growth as a result of these reforms.

Prime Minister Renzi’s promise to resign if the referendum vote is not successful may also create a wave of uncertainty in Italy’s economy. A referendum loss and his resignation could jeopardize the continuation of his reform program and his pro-growth economic policies.