Financial (in)stability and industrial growth: the cases of Italy and Portugal

Abstract

This paper discusses the relation between financial stability/instability and industrial growth in Italy and Portugal, taking as point of departure the similarities and differences between Portugal and Italy. Although with different intensities, both Italy and Portugal experienced very modest levels of economic growth in the years that preceded the global recession, both have seen the costs of finance increase after 2010, both had to respond with the implementation of severe austerity measures and, partially as result of this, both countries experienced a sharp drop in economic activity and a substantial increase in unemployment rates. Portugal and Italy also share a significant exposure to competitive pressures from emerging economies, due to the weight of traditional, low technology-intensive industries in their economies. In spite of all the common features, Italy and Portugal display important differences in the timing and strength of the aforementioned trends. The paper argues that the evolution of the manufacturing industry in both countries is largely a result of factors that are essentially unrelated with financial (in)stability, although some indirect impacts of the latter on industrial growth can be identified.