The European Union has a problem that it has been trying to cure for three decades with ever larger doses of the same medicine. More rules, tighter fiscal constraints, greater harmonisation and supranational control, and less room for independent national industrial policies were supposed to raise productivity and competitiveness. The opposite happened. Europe is falling further behind the United States and China, investment remains weak, productivity growth is anaemic, and the industrial base is shrinking across much of the EU.
Italy is perhaps the clearest example of what happens when the European medicine intended to modernise an economy begins to kill the patient. A recent study by Dario Guarascio, Philipp Heimberger and Francesco Zezza on Italy’s long-term economic decline is particularly instructive. In the 1950s and 1960s, Italy was one of the world’s most dynamic industrial economies. Even in the 1970s, its productivity performance was stronger than that of Germany, France and Spain. After 1990, however, the country began to fall sharply behind: productivity stagnated, industrial production lost ground, and per capita income increasingly diverged from German and French levels.
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