Italy’s Economy Is Under Pressure as Pandemic Continues
The government is walking on a tightrope as the coronavirus crisis grinds on.
Alongside the rest of Europe, Italy is in the grip of a renewed wave of the coronavirus and has responded by progressively tightening lockdown measures across the country. But first-wave slogans promoting resilience have given way to a sense of fatigue, which spilled over into anger in late October as the government announced new closures. The protests—led by owners of small businesses and restaurants, as well as self-employed professionals and seasonal workers in the catering and tourism sectors—have not yet surged into a mass movement, partly because the government quickly announced new economic rescue packages for those affected within these labor categories. The participation of violent fringes and the far-right, as well as the media’s focus on them, also contributed to the fragmentation of the protests.
Still, discontent remains palpable. Market traders took to the streets in Naples upon the announcement of a strict lockdown in mid-November. Restaurant owners from Tuscany gathered in Rome after a 10-day march. Earlier, arts and entertainment workers took to the streets with empty equipment trunks, symbolizing canceled events and precarious contracts. For the government, it is a challenging balancing act between protecting citizens’ health and the country’s economy. Italy’s economy relies on a significant level of informal work and many smaller businesses, both categories that have fallen through the cracks of efforts to stave off individual economic costs of the pandemic. Several regions hit hard by the virus were already grappling with high levels of unemployment pre-pandemic.
The Italian government has made one of the largest fiscal efforts in proportion to GDP among OECD countries. Despite that, support has failed to reach some of those most in need. Many families have been left without necessities or with insufficient safety nets. Unemployment benefits announced in March were burdened by severe bureaucratic delays, and were often insufficient to cover living costs for a protracted period of time. The Italian short-time work scheme is among the least generous in developed countries. According to the economist Andrea Garnero, this reflects the fact that the Italian welfare system has never been good at targeting the most vulnerable. Because the job retention scheme is linked to earnings, for workers without regular working hours or partially declared hours, income was simply slashed.
The summer saw relatively low rates of contagion compared to other European countries, and the virus made its autumn comeback in Italy later than elsewhere. But as of December, the government had declared nine out of 21 Italian regions and autonomous provinces at high or moderately high risk, using a system that classifies them according to the infection rate and the capacity of the local health infrastructure. Lombardy, worst-hit in the first wave, still tops the list for number of recorded cases and deaths.
Politicians have been feeding a sense of division. Local governors have picked arguments with the government about what color their region should be labeled—red, orange, or yellow, with lockdown rules proportionate to the level of risk. In Naples, local news outlets were reporting lines outside hospitals while the national government was insisting the data it received suggested it should remain in the lower-risk category. Elsewhere, disagreements had less to do with data and more to do with appeasing the uncertainty still faced by large swaths of businesses and workers.
“We have been facing additional costs, and we are not able to work to full capacity. We made sacrifices, thinking that the government would meet us halfway,” said Giuseppe Esposito, 62, the owner of a hair salon in Naples, which is allowed to stay open even under severe movement restrictions. The city and its region of Campania are now classed as medium-high risk.
Esposito took part in the protests in late October and founded an association of small traders and self-employed workers who, as he puts it, “no longer want to be represented by the old trade unions,” traditionally leaning to the political left and center. He said turnover of about $50,000 a year for his salon has decreased by 35 percent as a result of the crisis, while costs are high for small businesses across Italy. “It is hard to see the light at the end of the tunnel,” Esposito said in November.
That uncertainty is amplified in areas of Italy with levels of unemployment and insecurity that were already high before the pandemic hit. In the southern regions of Sicily and Campania, the number of people at risk of poverty and social exclusion from welfare and rights that other citizens or residents have access to in 2018 was over 50 percent compared to an Italian average of 27 percent, and just over 20 percent across the 27 European Union countries.
Salvatore Caruso, a 35-year-old graphic designer from Naples, said the uncertainty he faced before the pandemic has snowballed. Caruso was working as a freelancer with regular hours and pay when the pandemic hit. He had an external contractor agreement with a company that meant his contract could be terminated at any point with 15 days’ notice. That is exactly what happened last March. He got through the summer thanks to outstanding payments he was owed and by taking on occasional commissions from the few clients who were still investing in their communications.
“I have no access to welfare or any alternative form of income,” said Caruso, who says he fell through the cracks of the government rescue packages and existing welfare programs because, among other reasons, his work had decreased rather than stopped altogether. Caruso has now returned to work for the company that ended his contract in March, on the same conditions. He doesn’t know how long that will last. Caruso said his situation is “the norm, rather than an exception.”
“Many companies in the business center where I work will tell you to go and register as self-employed when they hire you,” he added. And that is comparatively good practice, as many employers and particularly smaller companies, he said, will opt for cash-in-hand payments.
“One specific difficulty Italy faces in this calibration exercise is that it has mostly small-sized firms and a significant non-officially recorded economy,” Francesco Papadia, a senior fellow at the Brussels-based economic think tank Bruegel, told Foreign Policy. “And these are the two areas where it’s most difficult to help businesses in difficulty.”
According to the Italian National Institute of Statistics, Italy’s informal economy is worth an estimated 11 percent of GDP and is most prevalent in the services sector—which is also the hardest-hit by the pandemic. The transportation and hospitality sectors, mostly relying on small and medium-sized businesses, account for about 40 percent of the informal economy’s estimated value of 192 billion euros. In the EU as a whole, informal work accounts for 11 percent of all private sector employment and tends to be more prevalent in Eastern European countries.
According to a recent report on poverty and social exclusion published by the Catholic nongovernmental organization Caritas, poverty is on the rise in Italy, and the profile of the “new poor” is changing. Between May and September 2020, a period that saw a partial economic recovery, the number of people who used the organization’s services increased by almost 13 percent compared to 2019, with the largest rise recorded among women, young people, and Italian families as existing inequality was exacerbated. While women are already at a disadvantage in the labor market, young people tend to work in more precarious jobs or temporary contracts. Italy was already one of the European Union’s most unequal countries, ranking 24th in 2017 on the Gini index when measuring income inequality among EU countries, excluding the United Kingdom.
“What is particularly concerning is the speed with which this profile is changing,” Federica De Lauso, one of the Caritas report’s authors, told Foreign Policy. “This new wave comes into a context that was already precarious.” In 2019, 4.6 million people in Italy already lived in absolute poverty.
The pandemic, she added, revealed how widespread informal work is throughout the country. “Our colleagues in the north too revealed just how common informal work is, made up of a myriad of small jobs in hospitality, tourism, caring,” De Lauso said, “and it’s worth remembering that a lot of the time, it is not by choice.”
Just a year before the pandemic, Italy launched a “citizens’ income” scheme guaranteeing a basic income to all job seekers who have been resident in Italy for at least 10 years. This year, an “emergency income” was meant to shield the most vulnerable in the pandemic.
Days after protests flared up in cities around the country, the Italian government announced a new 5.4 billion euro package (around $6.5 billion) to help the sectors hit hardest by the partial lockdown, such as entertainment venues, restaurants, and bars. These funds are set to increase as a growing number of regions and cities are subject to movement restrictions and closures. This adds to more than $100 billion Italy allocated to the health system, workers, companies, and the education sector so far to face the unprecedented crisis. Italy’s central bank projects that the country’s sovereign debt, already the second highest in the European Union after Greece’s, will reach 158 percent of GDP as the crisis grinds on.
While Italy’s debt is ballooning, it is also costing less as interest rates are kept low. As Papadia of the Bruegel think tank explains, there are three reasons for this. “One is that this is a universal phenomenon, interest rates as possibly as low as they have [ever] been,” Papadia said. “The second is specific to Europe and what the [European Central Bank] is doing in terms of purchases. The third is that Italian government is not pursuing the policies of the previous government.” Any change in those circumstances would be problematic for debt sustainability.
The suspension of strict EU budget rules allowed Italy and other badly affected countries such as Spain and France to raise their public debt. But the approval of the EU’s 2021-2027 budget and temporary recovery fund known as Next Generation EU, for a total of over $2 trillion—the largest spending package ever financed through the EU’s budget—is set for a bumpy road ahead. Hungary and Poland, supported by Slovenia, vetoed the budget over a clause that links access to the funds to respect for the rule of law. EU institutions have triggered procedures against both countries under Article 7 of the European Union treaty concerning its “fundamental values,” citing attacks on media freedom, minorities, and judicial independence. In turn, Hungary and Poland have accused the EU of double standards.
Italy is due to get an estimated 209 billion euros, around $250 billion, in recovery fund cash and plans to avail itself of both the grants and cheap loans it offers. The hope is that the fund will help Italy, the EU’s third-largest economy, out of the quagmire it has been in since the last economic crisis. And while there has been some pushback, particularly from opposition parties like the far-right League, about the strings attached to EU aid, this has largely focused on a smaller pool of money available through the European Stability Mechanism.
“If [the recovery fund] is used for good investment, then you could expect there would be significant improvement over time in Italy’s growth,” Papadia said. “The decisive factor to make Italian debt sustainable is growth. Italy used to be richer per head than the average EU country. It is now poorer than the average, just because it has been stagnating for [at least] two decades.”
Many see an opportunity for Italy to start over after the crisis, including foreign investors who are beginning to eye Italy’s infrastructure sector. But getting to that point will be a tightrope walk for the country’s EU-friendly leadership. The League has lost ground but still tops consensus polls, while the smaller, far-right Brothers of Italy is the only party significantly on the rise. With so much at stake for both Italy and the EU, leaving no one behind may be more urgent than ever.