Unlikely as it sounds for a country whose economy has grown by an average of a dismal 0.6 per cent a year in the last 23 years, Italy was once a model of economic growth and aspiration. During il boom from the late 1950s to the onset of the 1970s – a period of rapid urbanisation when the country built up lost ground – the economy expanded by 5.3 per cent a year and productivity improved by a remarkable 4.9 per cent annually. 

In 1987, once statisticians had added parts of Italy’s large black market to the official figures, its GDP overtook that of the United Kingdom. The Italians were so proud of that moment that they called it il sorpasso, ‘the overtaking [of the UK]’.

But fast forward three decades and Italy, though not on its economic deathbed, is certainly chronically ill. Italy is the only advanced G7 country that is not more productive than it was 22 years ago, according to analysis by Capital Economics (an independent macroeconomic research company). Il boom may not have turned into il bust, but Italy has become the senza fretta, ‘no hurry’ economy. Italy’s lack of growth is a big problem. 

Drawing on IMF numbers, Italy’s net public debt of $2.6 trillion was 1.2 times the size of its economy last year, and it will become almost 1.3 times the size by 2025 because it is not growing its way to fiscal health. Only Greece and Japan have worse figures among advanced nations. Italy has just escaped its third recession in a decade and is forecasted to grow by only 0.1 per cent this year. Unemployment is a woeful 10.2 per cent.

If Italy were not the third largest economy in the eurozone and the eighth largest in the world, one would be forgiven for thinking it was a struggling emerging market. But it is not. As the world learnt in the dark days of the eurozone sovereign debt crisis from 2010 to 2012, Italy is not only “too big to fail, but too big to bail”.

Rescuing Greece cost almost €300 billion – the biggest bailout in history. Those funds paid the debt that Athens owed its creditors. Italy’s debt is many multiples larger. 

This year alone, it must raise €220 billion. To put it another way, a Greek-sized rescue package would get Italy through for little more than a year. The eurozone’s pockets are simply not deep enough.

Making matters worse is the so-called ‘doom loop’ between Italy’s banks and the state. Italian banks are big holders of state debt. On one hand, this is a good thing as the interest paid by the government will, in theory, go back into the economy through the banking system rather than leaking abroad. But, on the other, it also creates a dangerous vulnerability.

Economists think that if the country’s sovereign credit rating turns to junk, regulations would force banks to post large losses and others to sell government bonds. A credit crunch would follow and, as the crisis escalates, in the words of the IMF’s warning last month, “public sector funds could have to be used to rescue failing banks” – funds that the state does not have. This would tip Italy towards insolvency. To underscore the seriousness of this, the IMF added, “This bank-sovereign nexus was at the heart of the euro crisis in 2011-2012.”

The eurozone’s pockets are simply not deep enough

The same terrifying scenario was what pushed Mario Draghi, the outgoing president of the European Central Bank, to promise to do “whatever it takes” for the eurozone in 2012 as fears for Italy peaked. Today, Italy is more fragile than ever. Its credit rating is just two notches above junk. Its debt is even more precarious and its populist government seems to want an unwinnable war with the markets. 

At last month’s IMF meetings, Italy was considered a bigger threat than the (threatened) ‘no-deal’ Brexit. Indeed, according to one economic analysis, ‘no-deal’ was a risk only because it would be the catalyst for an Italian crisis.

With Rome asking existential questions about the eurozone again, it may be thought that Brussels would be pulling it into line. But it cannot. Brussels may be able to draw up rules on health and safety at work or bird hunting, but, when it comes to stuff that really matters, it is remarkably toothless.

Last November, the European Commission opened an excessive deficit procedure against Italy as its public debt was in breach of the stability and growth pact. Rome reined in spending a little, but not enough to fall into line. Brussels should have followed through with a fine; but it didn’t, just as it didn’t follow through against Portugal and Spain in 2016 and turned a blind eye when Germany and France broke the three per cent deficit rule in 2003. France will break the rule again this year and, again, Brussels will ignore it, giving Rome carte blanche to act as it pleases.

The problem will now have to be faced by the incoming EU Commission. At that point, the crisis may well escalate. An Italian VAT increase from 22 per cent to 24.2 per cent is scheduled from January 2020, but the government opposes it. Without the extra tax revenue, the budget deficit will soar – driving debt to even more unsustainable levels.

Brussels will then face a choice. It can demand that Italy – a country forever teetering on the brink of recession – should press ahead with austerity policies that will certainly sap growth, or it can again turn a blind eye and let the debt spiral even more wildly out of control. Both are dangerous options.

Matteo Salvini, as he searches for funds to pay for vote-winning tax cuts, has proposed an amnesty for Italians hiding billions of undeclared euros in bank deposit boxes. Italians are thought to have €200 billion hidden in about 1.5 million security boxes, often the fruits of undeclared earnings.

The crux of the issue, however, is that Italy knows that its existential threat to the euro project is a form of power. Italy’s growth and debt problems are now so severe that its fate is intertwined with that of the eurozone. It is an unexploded bomb and time appears to be running out.