Will Italy replace Germany as an economic power?

2024-04-06 08:23:00, Kosova & Bota CNA

For 25 years Mauro Congedo and his brother have been finding small buildings of architectural beauty in Salento, a peninsula at the most south-eastern point of Italy, so to speak at the heel of the Italian boot, in the region of Puglia, and renovating them.

The flats and houses that Congedo restores in this remote region also find buyers from Germany or England. "It works well again," says the 50-year-old architect in a phone conversation.

During the Corona pandemic, business was completely suspended. But what is happening now after Corona in this sector is "madness". And time stands still a little, because he lengthens the "a". But only in appearance: Congedo is not very happy with Italy's economic spree.

From problem child to engine of development

The previous governments of Rome have had the habit, especially before the pandemic, of announcing bad economic forecasts by reaching important positions in the debt ranking, and now the country has turned into an engine of development in Europe. In the last quarter, the Italian economy had a 0.6 percent growth, while the German economy had a 0.3 percent economic decline in the same time period.

But even outside this period, the figures of the third most developed economy in Europe speak for themselves. "Since 2019, the Italian economy has grown by 3.8 percent," says Jörg Krämer, chief economist of Commerzbank, in a conversation with Deutsche Wellen. This economic growth is "double the economic growth of France and five times higher than than Germany's economic growth."

Whereas in Germany, the forecasts are cloudy. For example, the Organization for Economic Cooperation and Development (OECD) predicts economic growth of 0.3 percent. Leading German experts even think that economic growth will be 0.1 in the following year. And according to the OECD, Italy will have economic growth of 0.7 percent.

The stock market also benefits from the optimistic atmosphere. Thus the main Italian index FTSE MIB, where the 40 largest companies are listed, had a 28 percent increase last year, more than all other European stock market indices. Italy in development, a success story.

Confidence in the Meloni government is growing again

Economists initially reacted cautiously when Giorgia Meloni took office in the fall of 2022. The far-right prime minister campaigned with her "Brothers of Italy" party on a nationalist "Made in Italy" economic course. inciting hatred towards migrants and not properly distancing herself from Russia. The weekly "Stern" called her after the election "Europe's most dangerous woman". But from the point of view of economic policy, Meloni continued to stay on the course of her predecessor, Mario Draghi. This is bearing fruit for Italy, especially in the interest rate market. Thus, the percentage of debt interest that Italy receives is again at the level it was when Meloni took office.

During a press conference, held at the beginning of the year, Meloni tried to attribute the economic growth to himself. Meloni, who has now secured the post, said that especially the lack of political stability in the past has caused the economy not to develop.

But how much does economic development have to do with Meloni's successes? "A little," says Jörg Krämer of Commerzbank. "Great Development Explained by Italy's Liberal Fiscal Policy." Which means that the economic development of Italy is mainly based on taking on new debts. The new debts of the Italian state before Corona accounted for 1.5 percent of the country's gross domestic product, while in recent years they grew rapidly, reaching in the first half of 2023 to 8.3 percent of the country's gross domestic product.

Even the mountain with state debts is growing. Thus, the EU Commission predicted in January that state debts will reach the level of 140 percent of the country's gross domestic product this year, and will continue to grow even more next year. For comparison: in Germany the so-called debt ratio is at the level of 66 percent, while in France it is almost at the level of 100 percent.

The giant construction program boosts the economy

Since the end of 2020, the Italian state finances the adoption of various restructuring measures. Some restructuring measures help by 50 percent, others by even more. But especially the so-called Superbonis 110, which is given for restructuring measures in the energy field, is much preferred: Whoever wants to renovate the energy in his apartment or house, he gets back from the state all the costs plus an additional ten percent, having tax breaks that last several years. "It can be imagined that investment in construction has increased a lot," says economist and expert on Italy, Krämer. "This effect explains two-thirds of the economic development we are observing."

Architect Mauro Congedo is not too enthusiastic about the superbonus. Because everything has become very expensive. Because the prices have not only increased due to inflation, but the expenses for materials and personnel have also increased due to the superbonus. "When the state pays for everything, then people don't care how much the bill is going to be," says Congedo. Besides, nobody controls prices. Construction firms from Naples, Bari or the provincial capital, Lecce, had asked him several times to correct the expense figures. "They want me to get double. But I don't. Because it looks like I'm stealing," Congedo says.

In general, he thinks well of the bonus given for renovations in the energy field of buildings. Owners must share in the costs and not leave everything to the state to pay. Congedo does not have any special opinion about the Prime Minister, Giorgia Meloni. The only good thing about it is that it ended the superbonus.

Happy money from Brussels

In fact, the ultra-right prime minister has limited the Superbonus that was introduced by the Five Star Movement. In 2023, the state participated with 70 percent of construction costs, and this year 65 percent of renovation costs.

However, the tax benefits from the superbonus will significantly reduce the state's income next year. This suits the government of Rome, because billions will come from Brussels. Italy receives much more money than other countries from the European Corona Reconstruction Fund.

Until 2026, Italy will be given 200 billion euros in the form of grants and loans. "At least until that moment, the Italian state must reduce its large budget deficits. When he needs to start saving, then surely this miracle of economic development will also come to an end, because years have not been used to make structural reforms," ??says Jörg Krämer in a conversation with DW.

Even Mauro Congedo is worried that the superbonus will follow him for a long time. "The prices are too high and we are deeply in debt." The work will not end forever: he is currently working on eight projects at the same time./ DW