Tying Your Hands and Getting Stuck? The European Origins of Italy's Economic Stagnation

The dominant interpretation of Italian economic stagnation in the last decades is that this is due to insufficient liberalisation, but an alternative explanation emphasizes the unintended consequences of Italy’s strategy of tying itself to the European mast ('external constraint'). Based on historical reconstructions of three policy areas, public debt management, privatisation, and labour market policy, this paper seeks to adjudicate between these two rival accounts. It argues that insufficient liberalization fails to explain the Italian trajectory. The external constraint does a better job of explanation, but more as a necessary condition for stagnation than as a sufficient one. In other words, it would probably have been possible to manage the external constraint differently to produce better outcomes, but without the external constraint, the Italian stagnation would likely have been less deep.