Causes of the decline of economic growth in Italy with special reference to the post-euro period: a balance-of-payments approach

Abstract

The aim of this paper is to investigate the causes of the poor growth performance in Italy and the responsibility of the euro for this crisis. The theoretical approach applied is based on the balance-of-payments constraint hypothesis (known as Thirlwall's law), adapted to include internal and external imbalances. Our empirical analysis shows that both the extended model and the original Thirlwall's law over-predict the actual growth in Italy, suggesting that there are supply constraints that impede the economy from growing faster. Another conclusion is that part of the decline in economic growth is explained by the loss of competiveness during the euro period. A scenario analysis shows that a budget deficit and public debt discipline aiming at achieving the goals of the Stability Pact are not significant stimuli for faster growth. On the other hand, reducing the import dependence of the components of demand, or reducing the import and increasing the export shares in the economy, are the most effective policies for fostering growth in Italy.