Italy isn’t just any country. It’s the euro zone’s third-largest economy. It’s the world’s eighth-largest economy. The country’s rapidly worsening debt woes are threatening to drag down all of Europe. And here’s the scary part: European leaders still can’t quite agree on how to save Italy from implosion. “Financial assistance is not in the cards,” one official told Reuters late on Wednesday.
What sorts of reforms might Italy need to carry out? In a VoxEU article today, Daniel Gros of the Centre for European Policy Studies takes the optimistic view: Italy’s “growth fundamentals” are fairly sound. The country has an abundance of human and intellectual capital. It’s once restrictive labor-market regulations have slowly been reformed, and these days they’re no more of a hindrance to growth than Germany’s are. What’s more, Italy is investing plenty of money in R&D and innovation.
The one metric on which Italy scores horribly, Gros finds, is governance, especially on corruption and rule-of-law measures. Unfortunately, most of the reforms being foisted on Italy don’t really touch those issues. That’s a real worry, Gros notes, because figuring out how to get Italy growing again is “vital for the survival of the euro.”
For a different, more pessimistic take on how the Italy saga could play out, see this Reuters report. According to “E.U. sources,” Germany and France are now discussing plans for an overhaul of the E.U. that would establish a more integrated and “potentially smaller” euro zone. “It could truly be the end of Europe as we know it,” says one diplomat.