Italy and its economy are back in the spotlight. Italian public support for the European project is among the lowest in Europe; it is the eurozone’s third largest economy, but its economy is the same size as it was in 2000; and it has the third largest sovereign debt burden in the world, after the US and Japan write Ferdinando Giugliano and Christian Odendahl.

In a new policy brief ‘Europe’s make or break country: What is wrong with Italy’s economy?’Ferdinando Giugliano and Christian Odendahl analyse the reasons behind Italy’s economic woes and set out the reforms that need to be made at the domestic and eurozone levels for the country to  prosper. They argue that the euro has not helped Italy, but that Italy’s economic problems are mainly homegrown.

To address its economic stagnation, Italy needs to swiftly:

• recapitalise and restructure its banking system, preferably through raising private funds;
• reduce bureaucracy to make it easier to start a business or pay taxes, and reform the justice system so that disputes are resolved more quickly;
• cut to employers’ social contributions to encourage hiring, and lower subsidies for unproductive jobs while giving more support to the unemployed, especially re-training;
• boost investment in schools and universities, especially in the quality of teachers and academics; and
• switch expenditure from public consumption, such as the pension system, towards public investment.

To help Italy’s economy the Eurozone needs to:

• complete the banking union, which requires weaker states to reduce the amount of risk on their banks’ books, and stronger states to share risk in the form of common European deposit insurance;
• keep monetary policy loose and ensure that the average fiscal stance of eurozone governments supports demand; and
• change fiscal rules to encourage governments to invest more and consume less, including in Italy.

Commenting, the authors said: “Italy could pull the eurozone apart ­and indeed the EU. Labouring under a barely sustainable debt burden, Italy needs faster growth to counter growing anti-European sentiment and defuse political tensions. Unless future Italian governments, together with the eurozone, manage to turn Italy around, Europe could face another existential crisis”.

Ferdinando Giugliano is an economics commentator at La Repubblica and can be contacted on f.giugliano@repubblica.it or via +39 338 4683525. Christian Odendahl is chief economist at the Centre for European Reform and can be contacted on christian@cer.org.uk. The full report can be found at http://www.cer.org.uk/sites/default/files/pb_italy_FG_CO_19dec16.pdf