Italy’s fragility and the euro zone’s governance

The Italian economy has remained very fragile and will be even more so after the COVID crisis. The reason is that Italy is characterised by: No productivity gains and, due to population ageing, zero if not negative potential growth; Insufficient corporate investment, which is one of the causes of the lack of productivity gains, and which is explained by the low profitability and the problems of banks that lend to companies; A continuous deterioration in cost competitiveness, which explains the deindustrialisation and market share losses; Very high public debt, which growth will not make it possible to reduce and which imposes a restrictive fiscal policy to ensure fiscal solvency. Given these characteristics of Italy, it is impossible to let long-term interest rates on Italian public debt rise. This is because such a rise would cause: A loss of fiscal solvency and an Italian public debt crisis threatening the existence of the euro; The public debt crisis to spread to banks, given the high level of their government bond holdings, and a worsening of companies' financing problems; A decline in both corporate and public investment, exacerbating the problem of zero potential growth. Given Italy's structural weaknesses, we cannot see how the ECB can exit its policy of monetising public debt and keeping long-term interest rates very low; we also see the importance for Europe of helping Italy invest to restore its productivity .