Has the Italian economy really fallen behind Spain’s?

Just before Christmas, news that Spanish
per capita income had overtaken Italy’s surprised many Italians and left
Spain’s prime minister Jose Luis Zapatero celebrating. At the start of the new
year, Romano Prodi tried to refute the statistics. Concerned that the bad news
could be blamed on his government’s economic policy, Prodi claimed that Italy’s
per capita income is still 13 per cent ahead of Spain’s. Everyone chooses the
data he prefers but in reality both Prodi and Zapatero have reason to worry
about the economic outlook.

In December, Eurostat, the European
statistical office, issued the GDP data for all EU member states. According to
Eurostat, the numbers show that Italy’s GDP per capita dropped from 105 per
cent to 103 per cent of the EU average between 2005 and 2006. In the same space
of time, the data for Spain went up from 103 to 105 per cent. Zapatero promptly
spoke of “a historical achievement” and reminded the public that he had for a
long time predicted this success. In Italy, on the other hand, many
commentators interpreted Eurostat’s report to reflect the country’s serious
economic decline. Some pointed out that by 2012, even Greece, whose GDP per
capita currently stands at 98 per cent of the EU average, could overtake Italy.

However, the numbers are not as clear as
Zapatero would like. On New Year’s Day, prime minister Prodi issued a statement
claiming that taken as a whole Italy’s economy is about 50 per cent bigger than
Spain’s, and that in per capita terms it is still 13 per cent ahead of its
Meditarrean cousin. Nobody can dispute that the size of the Italian economy is
still much bigger than Spain’s and will remain so for a long time merely for
demographic reasons (Italy’s population is 59 million compared to Spain’s 42
million). However, in per capita terms the race is tight. Prodi got his data
from a report by the International Monetary Fund which estimated Italian GDP
per capita at 31 791 dollars and Spain’s at 27 767 dollars.

The IMF report allowed Prodi some breathing
space but the real problem for his government are not the absolute numbers but
the general downward trend that Italy’s economy is currently experiencing. It
is estimated that the Italian economy grew by ca. 2 per cent in 2007, but the
European Commission foresees growth rates of only 1.4 and 1.6 per cent for the
coming two years. In fact, the government is currently confronted by a whole
range of problems which include stangnating wages at a time of rising inflation,
a rising tax burden for workers and businesses, the need to bring down sky-high
public debt and the inability to moderate public spending due to the demands of
the far-left elements of the coalition.

At the same time, the Spanish government
should be careful not to overestimate the state of its country’s economy. It is
certainly true that Spain has experienced a period of high growth. Its GDP has
grown consistently by 3 or 4 per cent for more than a decade and it has also
made great progress in bringing down unemployment. Nonetheless, the growth has
been mainly driven by a housing market frenzy which looks increasingly
unsustainable. By some estimates more houses have been built in Spain alone
than in France, Germany and Italy put together during the last decade. Outside
the housing market, the performance of the economy was less impressive and
overall productivity growth remains unremarkable. It should come as no surprise if Spain were eventually to join the
European low-growth trio of France, Germany and Italy. Or, as a Financial Times columnist put it last
year: “The pain in Spain will follow years of rapid gain”.

The worry some Italian commentators
expressed of being surpassed by Greece merits a last comment. In September
2006, the Greek government announced that it would alter its GDP estimates by
including underground activities (such as cigarette smuggling, prostitution and
money laundering) in its statistics. This move upsized the Greek economy by 25
per cent. It also showed how arbitrary such statistical comparisons are and
that policy-makers should better focus on the more practical problems that lie
ahead.