Why Italy Is Going Broke

Italy is one of the world’s largest economies, a founding member of the European Union, and home to some of the most recognisable brands in luxury, automotive design and fashion. Ferrari, Gucci and a host of other global names were born there. Many of the continent’s wealthiest private households are Italian. To an outside observer, the country can appear idyllic: sunshine, elegant cities, designer boutiques, extraordinary food and a civilisation layered with thousands of years of history – all fitting neatly into one alluring postcard.

Beneath that postcard, however, lies a pattern that Italy has struggled to escape for decades. It is a recurring cycle of rise, stagnation and relapse. An economy that once helped power Europe is slowing to a crawl. A nation renowned for creativity, craftsmanship and innovation is struggling to retain its younger generation. A country that built empires of art and industry now faces pressures it can no longer ignore.

What is happening within Italy today goes far beyond a simple recession or a temporary downturn. It is the cumulative result of structural weaknesses, political choices and demographic realities converging at the same time. The story of why Italy is going broke again does not begin with the euro crisis, the austerity years, or even the global financial crash. In truth, the breakdown has been unfolding in slow motion for more than half a century.

Every time Italy appeared to be on the brink of a new beginning, something pulled it back. In the mid‑2020s, all those unfinished crises, deferred reforms and unresolved problems are colliding. To understand how the country reached this point, it is necessary to go back to the moment when everything appeared to be going right – because that is where the first cracks began to form.

From Miracle to Malaise

In the decades following the Second World War, Italy emerged as one of the fastest‑growing economies on the planet. Between the 1950s and the early 1970s, factories multiplied, exports surged, and household living standards rose at a pace Italians had never experienced before. This period became known as the “Italian economic miracle”. For a time, the country seemed unstoppable.

But the 1970s brought a sharp change in fortune. The oil shocks hit Europe hard, pushing up energy costs. Inflation spiralled. Italy experienced episodes of political violence from extremist groups. What had seemed like an endless boom began to falter. Growth slowed, costs soared, and for the first time the Italian state started running chronic budget deficits – consistently spending more than it earned in tax revenues.

Year after year, these deficits became the new normal. Rather than a temporary response to crisis, they evolved into a structural feature of Italian public finances and a warning sign of the difficulties to come.

The 1980s are often remembered nostalgically within Italy. Fashion flourished, manufacturing remained strong, and Milan became a symbol of European glamour and luxury. The country even enjoyed a brief period when its total economic output surpassed that of the United Kingdom – a moment Italians celebrated as proof of their success.

Yet beneath the surface of this optimism, a dangerous pattern was emerging. To sustain the boom and accommodate growing social expectations, Italy increasingly turned to borrowing. Public spending ballooned. The welfare state expanded quickly. Politicians, facing frequent elections and unstable coalitions, learned a simple but perilous trick: when growth slowed, they bridged the gap not through reform but through more debt.

It was akin to a household repeatedly upgrading its lifestyle using a credit card. The sense of prosperity remained intact – until the bill eventually arrived. For Italy, that reckoning began in the 1990s.

The Euro, Austerity and the Lost Decade

Entry into the European Union’s new monetary framework offered Italy international prestige and the promise of stability. Joining the common currency project, which would eventually create the euro, was seen as a way of anchoring the country firmly within the European mainstream.

However, this decision also imposed discipline. To qualify for the euro, Italy had to reduce its budget deficits sharply. That required politically painful measures: austerity, tax increases and structural reforms. While the country tightened its belt, an even more worrying trend emerged – productivity growth began to stall.

Factories became less efficient compared with competitors in Germany, France and even Spain. Layers of bureaucracy multiplied, complicating business operations and discouraging investment. Innovation slowed, and the economy became less competitive in global markets.

Even during periods of overall economic expansion, one stubborn indicator refused to improve: youth unemployment. In the late 1990s, despite growth, around one in three young Italians struggled to find stable work. The country was already failing to provide a viable future for a significant share of its younger generation.

Then came the global financial crisis of 2008. Banking systems seized up, credit flows evaporated and economies across the world entered recession. Many advanced countries managed to return to growth within a few years. Italy did not. Public debt climbed further. Banks accumulated large volumes of non‑performing loans. Businesses found it harder to access credit. Instead of ending the slump, austerity measures often deepened it.

By 2019, before the pandemic, the Italian economy was still smaller than it had been in 2008. An entire decade of growth had been lost – a phenomenon almost unheard of in a developed economy in peacetime. The country had slipped behind its peers and had not managed to climb back.

Yet many economists argue that this period, severe as it was, may not represent the peak of Italy’s crisis. The most profound challenges are structural and demographic, and they are now asserting themselves with increasing force.

A Demographic Time Bomb

Perhaps the most alarming fault line beneath Italy’s economy is demographic. The country is ageing faster and more dramatically than almost anywhere else in the world.

Today the median Italian is in their late forties – the highest median age in Europe and among the highest globally. If every citizen were lined up from the youngest to the oldest, the person in the middle would be approaching 50. Approximately one in four Italians is already over 65.

This demographic reality is visible in daily life, particularly in smaller towns and many areas of the south. Supermarkets are filled with pensioners. In some streets, it is rare to see young families or prams. But what is even more striking than the rising age profile is the collapse in births.

Italy’s fertility rate has fallen to around 1.2 children per woman, one of the lowest anywhere in the world. The level needed simply to keep a population stable is about 2.1. Italy is not just below that threshold; it is barely producing more than half the required number of children. Recent years have seen record lows in the number of births – even lower than during the world wars.

The long‑term arithmetic is unforgiving. Fewer babies today translate into fewer workers tomorrow. Fewer workers mean fewer taxpayers to support a rapidly growing retired population. If current trends continue, projections suggest that by the middle of the century there could be around seven elderly people for every ten working‑age adults.

In other words, for every ten people in employment, there might soon be seven retirees dependent on them for pensions, healthcare and social services. No modern welfare state can sustain such a ratio indefinitely without either accumulating unsustainable levels of debt or raising taxes to levels most citizens would find intolerable.

This leads directly to one of the most urgent issues in Italian public finances: the weight of its pension system.

The Pension Burden

Italy devotes around 16 per cent of its gross domestic product to pensions – one of the highest shares in the developed world. Roughly one euro in six that passes through the government’s hands is immediately paid out to retirees. For an economy struggling with low growth rates and high debt, this level of spending is a heavy burden.

Rather than easing the pressure, past policy decisions have often amplified it. Successive governments have introduced early retirement schemes and generous exit pathways from the labour market. One such measure, allowing people to retire in their early sixties after a specified contribution period, proved politically popular but financially damaging. It brought more people into the pension system earlier, even as the pool of younger workers contributing to it shrank.

Many analysts warn that unless the system is reformed, the numbers will simply not add up. There will not be enough people working to support those no longer in employment, particularly in a context where other spending demands – on healthcare, education and infrastructure – are also pressing.

Time to address this imbalance is running short. Demographic trends are slow moving but extremely difficult to reverse once deeply entrenched. Policies introduced today may only bear fruit decades from now. Italy therefore faces the challenge of acting decisively at the very moment when its fiscal space is most constrained.

A Lost Generation of Workers

If demographics pose a grave long‑term challenge, the immediate reality for many young Italians is already bleak. For decades, real wages have stagnated. Adjusted for inflation, many employees today earn little more than they would have done a generation ago.

It is not unusual for young graduates in major cities to take home between €1,000 and €1,300 per month. In Milan, Rome, Florence and other urban centres, even modest rented flats can consume half of that income before food, transport or other essentials are considered. Saving becomes extremely difficult. The idea of buying a home feels distant, if not entirely unattainable.

Low pay is only part of the problem. Youth unemployment has hovered at high levels for years, often around 30 per cent, not only during recessions but even when the broader economy has been expanding. For those fortunate enough to find a position, job security is rare. Many are employed on short‑term contracts, temporary roles or arrangements with little scope for progression.

The result is a pervasive sense of precarity. Workers may move from one fixed‑term contract to another, never certain they will still be employed a few months down the line. Under such conditions, it becomes difficult to plan a future, to start a family, or even to imagine a stable life within the country.

When low wages, persistent unemployment and chronic instability combine, many young Italians make a rational choice: they leave. Each year tens of thousands pack their bags for Germany, France, the United Kingdom, the United States and other destinations where they hope to find better opportunities.

There is a painful irony in this. Italy invests heavily in educating its youth. The state finances schooling, subsidises universities and often supports specialist training for years. After perhaps two decades of public investment in an individual, another country then hires that person and benefits from their skills, tax contributions and innovation. Italy effectively subsidises the human capital of its competitors.

This outflow of talent forms a self‑reinforcing loop. As more ambitious young people depart, those who remain see fewer peers, fewer role models and fewer reasons to believe that things will improve. When asked about their choices, many of those leaving insist that they love their country and its culture but cannot see how to build a secure future at home. The decision is not an act of disloyalty; it is a response to the economic reality.

Italy’s long‑term prosperity depends on a dynamic, productive younger generation. Yet the very cohort the country needs most is either emigrating or struggling under conditions that make it difficult to thrive. In effect, the people who might revitalise the Italian economy are choosing, understandably, to save themselves first.

Productivity and the Structure of the Economy

To understand why wages stagnate, why opportunities are limited and why the economy struggles to grow, it is essential to examine the fundamental engine of prosperity: productivity.

Over the past two decades, productivity growth in Italy has been exceptionally weak. Output per hour worked has risen only fractionally – by roughly four per cent in total since the 1990s. In practical terms, an hour of labour today generates little more value than it did decades ago, even as costs and living standards expectations have continued to rise.

For a business, this is a difficult environment. If output per worker barely increases year after year, it becomes harder to grant significant pay rises without eroding competitiveness. Meanwhile, foreign competitors who manage to boost productivity through technology, organisational improvements or scale can afford higher wages and still compete successfully in global markets.

Italy’s economic structure contributes to this challenge. Approximately 99 per cent of its firms are small or medium‑sized enterprises, many of them family‑owned. This model served the country well in previous decades. Small enterprises could adapt quickly to specific niches, produce high‑quality specialised goods and embody the artisanal excellence for which “Made in Italy” is renowned.

However, the world economy has changed. Competing effectively in many sectors now requires large investments in advanced machinery, digital technology, research and development, and international marketing. Small firms often lack the capital or the risk appetite to undertake such investments at the necessary scale.

As a result, many Italian companies enter the global race already at a disadvantage compared with large foreign corporations supported by abundant financing, cutting‑edge equipment and integrated supply chains. Italy still ranks among the leading manufacturing nations by volume, but much of its industrial base relies on ageing equipment and production techniques that belong to an earlier era.

The skills, creativity and dedication of Italian workers and managers remain strengths. Yet without modern tools and infrastructure, those strengths cannot be fully translated into higher productivity. It is like asking a world‑class athlete to compete using equipment that is decades out of date. Talent can compensate only up to a point.

While other European countries chose to consolidate industries, foster industrial champions or embrace automation at scale, Italy largely persisted with a fragmented model of small producers. In an earlier period, this conferred agility. In the current global landscape, it risks leaving the country stuck between high‑tech, high‑productivity competitors and low‑cost, labour‑intensive producers.

The Weight of Debt

Overlaying these structural issues is a financial constraint that shapes almost every policy debate: Italy’s public debt. The country’s debt‑to‑GDP ratio now stands at around one and a half times its annual economic output, among the highest in the developed world.

This burden did not appear suddenly. It accumulated gradually, year by year, through persistent deficits, incomplete reforms and the habit of using borrowing as a substitute for difficult choices. One might picture it as a backpack that grows heavier with every passing decade. At first it is manageable; eventually, it bends the posture and makes even modest steps forward exhausting.

The nominal value of this debt runs into the trillions of euros. However, more important than the size of the stock is the cost of servicing it. Italy spends tens of billions annually on interest payments alone. These funds could otherwise be used to modernise schools and hospitals, upgrade infrastructure, support research or reduce the tax burden on work and investment. Instead, they are paid to bondholders simply to prevent the debt from growing even faster.

Membership of the eurozone brings both benefits and constraints. Italy can no longer devalue its currency to make exports more competitive or to reduce the real value of its obligations. It cannot print money unilaterally to escape a debt spiral. Countries outside such a currency union sometimes use depreciation as a painful but effective way to regain competitiveness. Having adopted the euro, Italy relinquished that option.

The only sustainable route out of a high‑debt, low‑growth trap, under these conditions, is through stronger productivity and credible structural reform. Yet such reforms often require time to bear fruit and can entail short‑term pain. This is where another longstanding Italian difficulty becomes central: political instability.

Politics, Paralysis and Short‑Termism

Since the end of the Second World War, Italy has experienced more than sixty governments. Cabinets rise and fall frequently. Coalition partners realign. New parties emerge and vanish. In this environment, long‑term planning is exceptionally difficult.

Major reforms – of taxation, pensions, labour markets or bureaucracy – tend to be initiated by one government, only to be diluted, reversed or abandoned by the next. A tax overhaul may be drafted, then shelved when a coalition collapses. A pension adjustment might be passed, only to be softened in the face of protests before its savings materialise. An industrial strategy could be announced with fanfare and subsequently forgotten amid early elections.

The outcome is a pattern in which policies come and go, but the underlying debt and structural problems remain. Each postponed reform adds to the weight on the system. Short‑term fixes push the problem further into the future while often making it more difficult to address later. Interest payments eat an ever larger share of the budget, leaving less room for investment or social support.

Italy today is therefore not simply paying for the mistakes of recent years. It is carrying the cumulative cost of four decades of avoiding the hardest choices. Time and again, temporary comfort – continuing generous programmes, delaying painful adjustments, minimising conflict – has been chosen over long‑term stability.

In such a setting, confidence matters greatly. If investors believe that reforms will be implemented and that growth will resume, the cost of borrowing remains manageable. If they doubt the political system’s capacity to act, markets may demand higher interest rates, further tightening the bind. Italy’s debt machine does not simply slow of its own accord; it accelerates when growth falters, when politics freezes and when trust erodes.

The Shadow Economy and the Bureaucratic Maze

Another set of challenges lies in the relationship between Italy’s formal economy and the vast area of activity that occurs outside the official system. In some respects, the country is being drained from both ends at once.

On one side, a large shadow economy allows money and work to escape taxation and regulation. Estimates suggest that this informal sector may account for up to a quarter of Italy’s total economic output. That means a significant proportion of services, transactions and labour never appear in official statistics and do not contribute to public finances.

For a state already grappling with high debt and limited growth, this represents a serious wound. Revenue that might fund schools, transport networks or digital transformation is lost. Legitimate businesses that comply with the law end up shouldering a higher tax burden to compensate. This, in turn, breeds resentment and a sense that obedience to the rules is punished rather than rewarded.

In some regions, particularly in the south, criminal organisations exploit these gaps. They entrench themselves in local economies, blending illegal activities with semi‑formal or informal enterprises. This complicates efforts to build a transparent, competitive environment.

On the other side, those who attempt to operate entirely within the legal framework often find themselves entangled in a dense web of bureaucracy. Italy’s administrative processes are notorious for their complexity. Opening even a small business can require months of navigating forms, securing stamps, obtaining signatures and visiting multiple offices. Many of these offices still rely heavily on paper documentation and procedures designed decades ago.

For aspiring entrepreneurs, especially younger ones, this can be discouraging. Someone wishing to start a bakery, a technology start‑up or a small workshop may have the ideas, the skills and some initial capital, yet face endless procedural delays before earning a single euro of revenue. Progress often depends on documents moving from desk to desk within limited office hours, turning each day into a negotiation with the system itself.

The consequences are predictable. The more convoluted the official route becomes, the more tempting it is for people to step outside it. Not because they relish illegality, but because they perceive no feasible alternative. In this way, excessive bureaucracy inadvertently fuels the very shadow economy that undercuts the state.

Foreign investors are acutely aware of these issues. On paper, Italy is an attractive destination: a substantial manufacturing base, highly skilled engineers, globally admired brands and access to the broader European market. Yet when potential investors confront the reality of slow approvals, administrative opacity and inconsistent enforcement, some decide to place their capital elsewhere.

Innovation also suffers. When start‑ups wait months for simple registrations, when research institutions face protracted approval processes, and when manufacturers endure long delays for basic permits, momentum is lost. Promising ideas fade before they reach commercial viability. Competing countries, offering streamlined digital procedures and more predictable regulation, become more appealing by comparison.

The result is an economy split in two directions. A sizeable portion of activity operates off the books, depriving the state of revenue and undermining fairness. The official economy moves slowly through a maze of forms and offices, discouraging initiative. One side ignores the rules entirely; the other becomes trapped within them. Both forces push Italy further away from robust, sustainable growth.

Can Italy Change Course?

The question that inevitably arises is whether Italy can still save itself from long‑term economic decline. The answer depends on whether reforms can match the scale and seriousness of the crisis.

Incremental tweaks or short‑lived initiatives will not suffice. The country faces intertwined challenges: an ageing population, a strained pension system, stagnant productivity, heavy public debt, a large shadow economy, burdensome bureaucracy and chronic political instability. Each of these issues would be difficult enough on its own. Together, they form a complex web that holds the economy in place.

Change is not impossible. Italy remains a wealthy country, with tremendous cultural capital, industrial capabilities and creative energy. Its design, food, fashion and engineering continue to command admiration worldwide. The danger lies in relying on this inherited wealth and reputation while ignoring the underlying fractures.

Without determined action, Italy risks remaining a beautiful postcard perched on a fragile foundation – a nation just rich enough to avoid outright collapse, but too rigid and divided to undertake the deep reforms that lasting prosperity requires.

Ultimately, the most unsettling aspect of Italy’s predicament is not only the debt figures, the sluggish growth statistics or the bureaucratic tales. It is the silent decision being made every year by tens of thousands of young Italians who choose to build their lives elsewhere. They are voting with their feet on the question of whether their country can offer them a future.

A nation can draw on its past for confidence and inspiration. It can live for a time on the achievements of previous generations. But it cannot stand indefinitely if its future generations have already started to walk away.