Recession Hits Italy, Indicates Broader European Slowdown

Valdis Dombrovskis (right), European Commission Vice President for the Euro and Social Dialogue, recommended that the Italian government change its policies after the country entered its first technical recession in five years (flickr).

Recently released economic figures from late 2018 confirm that Italy is suffering a recession in technical terms. While national politics and fiscal constraints distinguish Italy from the rest of the European Union, lowered economic forecasts that the European Commission released on February 7 indicate that the wider European economy is also flagging.

The Italian economy grew overall in 2018, but data made public on January 31 shows that Italian GDP fell 0.1 percent and 0.2 percent in the third and fourth quarters, respectively. Reuters reports that this is the first time in five years that Italy has undergone two consecutive quarters of negative growth, and the New York Times notes that the recession puts Italy at greater risk of defaulting on its exorbitant public debt, which stands at 132 percent of GDP.

One week later, the European Commission released growth predictions readjusted from November 2018. Originally believing that Italy’s GDP would grow by 1.2 percent in 2019, the Commission corrected that to 0.2 percent (the slowest pace in the Eurozone, the Wall Street Journal pointed out).

EU officials blame the populist Italian government for the recession, citing fiscal irresponsibility. According to Reuters, opponents of the populist coalition claim that Rome’s recent conflict with Brussels over deficit spending drove up borrowing costs and deterred investment.

The New York Times reports that economists linked the government’s unpredictability to reduced consumer spending. Reuters quoted European Commission Vice President for the Euro and Social Dialogue Valdis Dombrovskis, who recommended that the Italian government change course with “responsible policies that support stability, confidence and investment.”

In response, Italian officials deflected blame. Reuters highlighted Deputy Prime Minister Luigi Di Maio’s claim that the recession “certified the failure of the entire political class which Italians sent packing.” Economy Minister Giovanni Tria challenged the economic diagnosis entirely, saying, “For now, we can talk about a setback rather than a real recession.”

Denying the Italian predicament and its possible domestic causes hardly helps, but Italy’s downturn is admittedly not unique. The Commission’s new, less optimistic predictions apply not just to Italy but also to Germany and the entire Eurozone.

As a pro-EU “creditor” country, Germany contrasts against a debt-laden, populist Italy. However, as the Wall Street Journal reports, Germany itself came close to two consecutive quarters of negative growth, with December 2018 marking the fourth consecutive month of declining German factory output.

The trouble stems partly from Beijing. As the New York Times explains, Germany and other European manufacturers have come to depend on exports to China, which buys heavy machinery for infrastructure development projects. With the U.S.- China trade war and the decline of the Chinese economy, most European nations face grim economic outlooks.