Being prime minister of Italy is not much fun. Last week’s downgrading of Italy’s government debt by Standard & Poor’s and Fitch Ratings must seem just another blow to a government that won a narrow election victory and has since seen its support in opinion polls slump. Yet appearances may be deceiving. Italy needs such shocks if it is to put through the needed policy changes.

The analysis by Fitch Ratings presents a dismal story.* Over the past five years, gross domestic product has grown at a compound rate of just 0.6 per cent a year. In contrast to Germany and Japan, Italy’s weak growth is also, in substantial part, the result of deteriorating external competitiveness. Domestic demand has grown by about 0.4 percentage points a year faster than GDP since 2000.