Constrained economic policy in Italy’s dual-hybrid economy

Abstract

ABSTRACT This article examines recent developments in Italy’s economic and fiscal policymaking. It does so by contextualising the 2023 changes in the Italian National Recovery and Resilience Plan (NRRP) within three broader aspects which have characterised the Italian political economy: (1) the country’s conservative fiscal trajectory inside the monetary union (EMU); (2) the expansionary economic policies pursued in the face of both the pandemic and energy crises; (3) the peculiar characteristics of Italy’s ‘dual-hybrid economy’. The article posits that, since the EMU, Italy has continuously run primary budget surpluses higher than its EMU peers. Only since Covid-19, and with the relaxation of EMU constraints, has Italy’s fiscal stance turned expansionary. This has allowed space for various socioeconomic policies to partially shield households and firms from the crises’ fallout. However, with a return to fiscal conservatism, the NRRP now represents the only game in town to try and address Italy’s dual hybridity characterised by weak state capacity and supply-side institutional inconsistencies as well as two diametrically opposed regional growth regimes in the North and the South.