Its populist leaders said they were on the cusp of an economic miracle to rival the 1960s, but debt and uncertainty intervened

Sharing his predictions on the economy less than a month ago, Luigi Di Maio, the Italian deputy prime minister, believed the country was on the cusp of an economic miracle akin to the one enjoyed in the 1960s.

“During that period we built highways, now we can build digital highways,” he enthused. His comments were met with derisive laughter.

There was even less to laugh about on Thursday when figures revealed that Italy, which is saddled with a public debt of about 130% of GDP, had lurched back into recession for the third time in a decade.

Fabio Franceschi, owner of Grafica Veneta, Italy’s largest printing house, is among the many businesspeople in despair. “The country is in the hands of a couple of kids,” he told the Observer, referring to Di Maio and his co-deputy, Matteo Salvini.

Far from being on the verge of a boom, Italy is at a “tipping point”, he added. “We hope they become conscious [of the situation], as things are becoming really difficult.”

Franceschi said the decline was partly due to the uncertainty being created by a government whose 2019 budget contains little in the way of spurring investment, and which has made blocking migrants at Italian ports, spats with France and campaigning ahead of the European elections in May its priorities.

“With all of this … we are becoming an uncivil country. There is no focus on business and job creation. As for the rowing with France – we should never compare ourselves to other countries. France has a credibility that we don’t have at this moment.”

It’s a view shared by most economists, many of whom cite Italy as the most likely spark for the next eurozone crisis.

Officials in Rome can only look back over the past 10 years with sadness. Italian GDP is about 5% below where it stood in 2008 and unemployment, which hovered around 6% before the financial crisis, remains stubbornly at just over 10%.

Luigi Di Maio: ‘Noa we can build digital highways.’ 

Poverty levels are up and there is little extra money in the kitty to invest for the future without increasing the country’s enormous debts.

A budget forged by the coalition of Salvini’s League party and Di Maio’s Five Star Movement (M5S) was agreed in December after months of battling with the European commission.

At issue was the debt mountain and how the coalition planned to increase it in breach of EU rules. The EU’s 3% annual deficit limit was safe, but the rule preventing member states from increasing already high debt-to-GDP levels was going to be contravened.

A compromise was reached once the EU accepted forecasts for 2019 that showed Italian GDP increasing by an optimistic 1%. With the economy now in recession as it enters the new year and GDP growth flat at best, the prospects for maintaining Italy’s debt mountain at 130% of GDP are slim.

Lorenzo Codogno, a former chief economist at the Italian finance ministry, believes the budget has set Rome on course for another crisis.

“All the leading indicators suggest the first quarter of the year will be as bad as the last, and the second quarter will be flat. It’s likely things will pick up from there, but even then, it will mean the economy finishes the year in a weak position,” he says.

Salvini and Di Maio have put increases in pension entitlements and plans to introduce a basic income high on their agenda, along with taxes on banks and cuts to business tax reliefs.

Codogno, who is a visiting professor at the London School of Economics and runs his own London-based consultancy, said cuts to public investment and a mix of extra taxes and benefit giveaways fail to address long-standing barriers to growth, storing up problems that could prove ruinous in a year’s time.

“The coalition is clearly anti-bank and anti-business. It doesn’t help businesses increase investment if they must pay more in tax. Extra taxes on banks could lead to a liquidity crisis – maybe not now but next year, possibly.

Matteo Salvini, deputy premier and leader of the rightwing League party.

“And the extra money given to pensioners and through the basic income increases the structural deficit, and that will be difficult to reverse if the government gets into financial difficulties,” he added.

While he recognises the awkward situation Italy finds itself in, the finance minister, Giovanni Tria, put an optimistic gloss on the country’s prospects in a speech to Columbia University students on Thursday.

The former academic, who argued for tighter budget control before giving way to Salvini, Di Maio and the prime minister, Giuseppe Conte, said that Italy’s competitive export sector was behind the sizeable current account surplus of about 2.5% of GDP, “in spite of persistent overvaluation of the exchange rate and the negative effects of the [financial] crisis”.

He also said that Italian household finances were in a stronger position than most other European countries, with private wealth estimated at more than twice the national debt. That national debt, despite being among the largest in the world, is held mostly by domestic investors. In essence, just like the Japanese, Italians would rather lend their government money than pay enough taxes for it to function.

Tria did not address the issue of tax in his speech. He preferred to blame the Germans. He said Berlin’s emphasis on trade with China and the far east had denied the rest of the eurozone the support it needs from German business.

“The model pursued by the German export-led growth appears to be at the root of the lack of convergence and the loss of dynamism across the European regions,” he said.

In essence, Tria was saying that only when the Germans buy Italian, Spanish and French industrial products can the eurozone’s heavy industries and tech companies generate enough profits to reinvest in their businesses and become more productive.

Tria is not the only one playing the blame game. Conte has pointed to global trade tensions and their negative trickle-down effects on Italy’s exports as causing the country’s first recession since 2013. He said even “the most naive analysts” were aware of the dampening effects on exports of the tariff dispute between Washington and Beijing.

Salvini went as far as to blame the bridge collapse in Genoa on the EU’s tough line on the budget, saying: “Spending that saves lives, jobs and the right to health must not be part of rigid calculations and of rules imposed by Europe.”

Responding to the salvo, the EU budget commissioner, Günther Oettinger, tweeted: “It is very human to look for somebody to blame, when [a] terrible accident happens … still, good to look at facts.”

Codogno said there were probably enough funds in the public investment budget to improve infrastructure without a further boost.

“Italy has other issues than just the budget. A public procurement code brought in by the previous government – one that is designed to tackle corruption – has actually made public officials more cautious. It means that funds already allocated are not being spent.”

There was a time when the Italian coalition partners heaped most opprobrium on the euro, echoing comments by Tria that Italy had battled vainly against a high exchange rate. But Italian wealth is held in euros, and that complaint appears to have evaporated under pressure from Europe’s most rapidly ageing voting population.

What remains is the idea that Europe should be doing more for the Italian economy through its various investment programmes and a greater sharing of eurozone debts. There is sympathy in some European capitals for Rome’s agenda, but not in Paris or Berlin.