In Europe, we can look on the bright side

We may be "chewing on life's gristle", as Eric Idle wrote, but in Europe the economy can offer brighter prospects. English original of article published in Italian today by La Stampa

Well, geopolitics is not going to cheer us up, unless we consider the chaos, idiocies and betrayals emerging from the Trump administration as a form of entertainment. The papal funeral and conclave bring different emotions, although as excuses to watch Ralph Fiennes and Stanley Tucci in Conclave or, better, Nanni Moretti’s more amusing Habemus Papam from 2011 they do permit some diversions. But let me instead offer a surprising source of at least relative optimism: economics.

You may be thinking that this English writer must be borrowing from an English movie, Monty Python’s Life of Brian, and the song which ends that movie of religious — some say sacrilegious — satire: "Always Look on the Bright Side of Life". And my argument about the economic prospects does in a sense echo that spirit. But please bear with me.

The case for optimism about the European and hence Italian economy is not about the short term. This year, the outlook for growth in jobs and incomes is poor, given the immediate impact of Donald Trump’s tariffs on our exports and given a pervasive mood of uncertainty that is affecting investment decisions everywhere.

With the German government forecasting that 2025 will represent a third straight year of recession, Europe has no “locomotive” economy driving growth across the continent. The prospect is not for a disaster but for stagnation, across most of Europe and in Italy itself. The United Kingdom is in a similar situation.

Yet if we look beyond 2025, there are some considerably brighter signs. They begin with the expansion planned for public investment in Germany by the new government which will take office soon after May 6th. Germany is Europe’s only major economy with room for a substantial fiscal expansion, and it has that room thanks to its government’s parsimony in the past.

Now that the incoming government has released the “debt brake” that produced that parsimony, its planned extra spending chiefly on defence and infrastructure of €1 trillion over the next decade is likely to represent an uplift in demand that benefits a wide range of countries, including north and central Italy where many companies form part of German supply chains. Europe will have a “locomotive” again. This German expansion is set to be accompanied by new common borrowing mechanisms to fund increased defence spending by all the EU’s NATO members, and by the U.K. too under a U.K.-EU defence agreement set to be signed during the next two weeks.

Economic forecasters looking ahead to the next three or four years have a difficult task of trying to balance the negative effects of America’s tariffs against the other known or likely forces, alongside this boost in demand from extra public spending: the rise of the euro against the dollar, which is making EU exports less competitive; the positive chance that European companies may be able to gain market share from American ones in countries such as China since their goods will not face retaliatory tariffs; declining energy costs as oil and gas prices decline, thanks to an American recession; and, finally, the potential negative impact on long-term interest rates from a rise in European public debt.

No one can be confident of the outcome. A vital point to remember is that the extra public spending represents an opportunity for economic revival but does not make a sustained revival inevitable. Sustainable prosperity cannot be created simply by increasing public debt: if it could be, Italy would be the richest country on earth. An increase in German debt, with a new round of collective borrowing by the European Commission, will create a short-term boost, but can create long-term growth only if the money is used to increase efficiency and productivity, and if it is accompanied by reforms to assist that process.

Italy’s experience with the EU Recovery Funds for the PNRR illustrates this point. The more than €200 billion in EU grants and loans arriving in Italy in the five years ending in 2026 have certainly supported economic growth. But there is no evidence that the resulting spending has made any significant difference to the country’s productive capacity or its dynamism. The benefit is likely to be temporary, not a long-term one.

Nevertheless, Italy has made one quite positive contribution to the European debate about collective borrowing. The Italian contribution is that the PNRR funds have been handled well, even if slowly, without the sort of corruption or wastefulness that some northern European sceptics warned would happen. As a plan to boost long-term growth, the PNRR must count as a disappointment, but in the European debate it counts as a reassurance. First Mario Draghi and now Giorgia Meloni have made European collective borrowing look less risky, which helps make the further use of EU debt more feasible.

The international perception of the Meloni government’s management of the Italian economy is a revealingly contradictory one: the good news is that Meloni and her economy minister Giancarlo Giorgetti have done very little to intervene in the economy; and the bad news is also that they have done very little.

The government has been cautious, quite disciplined and unambitious, which has kept it popular with the electorate as well as with the financial markets. Yet this means that very few of the structural reforms in justice, competition policy and public administration that the Draghi government promised would accompany the PNRR have been done or sustained by its successor. The risks have been reduced but the opportunity has been missed.

The big question for Europe, beyond the immediate and vital challenge of supporting Ukraine in the face of American betrayal and continued Russian aggression, is whether it can learn from Italy’s missed opportunity with the PNRR and turn the next phase of debt-fuelled economic expansion into a long-term revival.

The recipe has also been laid out for Europe by Draghi, in his famous report last year on competitiveness for the European Commission, which called for the sort of boost in public and private investment that is now on its way. We will now find out whether his ideas can be driven more effectively from Brussels and Berlin than they have been from Palazzo Chigi. If they are, the brighter economic future for Europe could last for a generation; if not, perhaps just four or five years.