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FLORENCE – Two months after the Italian general election on March 4, amid continuing uncertainty about what kind of government will emerge, a strange complacency seems to have set in. Yet it would be foolish to believe that a country where anti-system parties won 55% of the popular vote will continue to behave as if nothing had happened. The supposed “barbarians” are not at the gate anymore. They are inside.

The populist Five Star Movement, which won by a landslide in Southern Italy, has promised to increase spending on public investment and social transfers, while reversing the pension reform enacted a few years ago. The League party, which captured the North, also promises to dismantle the pension reform, as well to cut taxes, and has openly mooted the idea of leaving the euro. Both parties want to relax the European fiscal straitjacket, though in different ways. At least one of them is bound to be part of the governing coalition.

The economic consequences could be profound. With a 132% debt-to-GDP ratio, Italy’s public finances are precarious. Should markets start questioning their sustainability, the situation would quickly spiral out of control. Italy is far too big for the European Stability Mechanism to tackle a debt crisis there in the same way it did in Greece or Portugal. The European Central Bank would need to come to the rescue. The debt might even end up being restructured.

The economic consequences could be profound. With a 132% debt-to-GDP ratio, Italy’s public finances are precarious. Should markets start questioning their sustainability, the situation would quickly spiral out of control.

There is little doubt, therefore, that the European Union will insist on fiscal discipline. The question is what strategy Italy should adopt to tackle its fiscal problem. Contrary to conventional wisdom, Italy’s high public debt is not the result of runaway budget deficits – at least not of recent ones. With the exception of 2009, the primary balance (which excludes interest payments) has been in surplus for the last 20 years. No other eurozone country matches this performance.

The root of Italy’s public-finance problem is that it inherited excessively high debt from the 1980s and has not recorded significant economic growth for two decades. Real (inflation-adjusted) GDP in 2017 was at the same level as in 2003, and real GDP per capita was at the level of 1999. With a stagnant denominator, it is hard to reduce the debt-to-GDP ratio: the legacy of the past continues to weigh excessively on the present.

A thought experiment helps in understanding Italy’s problem. Had France followed the same policy as its southern neighbor since the launch of the euro in 1999 – that is, had it recorded, year after year, the same primary balances – its public debt today would be 45% of GDP, instead of 97%. The difference between the two countries is not that France has been wise and Italy profligate. Quite the contrary. The reason why France has a significantly lower debt today is that it inherited a better fiscal position and has been growing faster.

The lesson, therefore, is that Italy’s key priority should be to revive growth. But this cannot be accomplished by relaxing the brake on public spending. The bulk of Italy’s growth problem comes from the supply side, not the demand side. As documented in a recent paper produced by the Bank of Italy, the country’s productivity performance is truly dismal: over the last two decades, output per employee has decreased by 0.1% per year, compared to 0.6% growth in Spain, 0.7% in Germany, and 0.8% in France. Furthermore, the demographic outlook is frightening: the working-age population, currently at the same level as in the late 1980s, is set to decline by 0.5-1% annually in the years to come. The burden of repaying the debt will fall on a smaller labor force – even more so if the retirement age is lowered.

Boosting productivity is therefore imperative. On paper, the recipe for success looks straightforward: economic policy should aim at reducing the gap between larger companies, whose performance matches those of their German or French counterparts, and smaller firms, where productivity is half as high. Small companies everywhere are less productive than large firms – after all, growth is a selection process – but Italy’s peculiarity is that such companies are both much less efficient and much more numerous. For each innovative champion that sells cutting-edge products on the global market, there are many poorly managed companies with fewer than ten employees that produce only for the local market. It is this high degree of fragmentation that explains Italy’s poor aggregate performance.

The latter would be well advised to put the need for a growth and productivity policy, rather than simple adherence to fiscal targets, at the top of the agenda.

Two Italian economists who teach in the United States, Bruno Pellegrino and Luigi Zingales, have investigated what explains this peculiar situation. Their conclusion is that neither sectoral developments nor credit constraints nor labor-market regulation can account for the observed productivity developments. Instead, they emphasize family management of the smaller firms and a tendency to select and reward people on the basis or loyalty rather than merit. As they put it, familyism and cronyism are the ultimate causes of the Italian disease.

These observations have direct implications for future discussions between the next Italian government and its European partners. The latter would be well advised to put the need for a growth and productivity policy, rather than simple adherence to fiscal targets, at the top of the agenda. And they should focus on the most critical reforms, rather than on a long wish list of standard recipes.

It is hard to gauge whether the Italian government that will emerge from the ongoing negotiations will be ready to respond. All political parties have clienteles to take care of, and the insurgents are no exception. They might well be reluctant to swallow the harsh medicine that Italy needs. But they should realize that though they may be popular, unfunded distributional proposals will ultimately prove ineffective, even more so if the productivity problem is not addressed head-on. Political ruptures sometime provide a unique opportunity for addressing seemingly intractable problems. The chance of such an outcome may be slim, but it should not be ignored. After its political upheaval, Italy now needs an economic one.