Economic stagnation and recession: the difficult Italian transition to the Monetary Union

The stagnation of the Italian economy since the mid-1990s can only be understood with reference to the great transformations that occurred in the previous two decades. This long interval was characterized by a process of rapid modernization and, also, by economic policy mismanagement. These changes generated an inefficient institutional model, a dysfunctional variant of the coordinated market economies of Continental Europe. In the mid-1990s Italian policy makers had to make painful and swift fiscal and institutional adjustments to correct economic imbalances and comply with the provisions of the Maastricht Treaty. These adjustments were, however, incomplete and did not solve the two most important problems that explain the fragility of the Italian economy in the financial crisis: stagnation of productivity and little internal adjustment (in terms of wage dynamics and reallocation of labor and capital across sectors and firms) to fend off the consequences of a loss of competitiveness in world markets.