Perhaps the most important question hanging over the European economy this year is whether Italy’s recovery is for real.

Statistics show that Italy last year emerged from its seven-year slump, growing by 0.8% in 2015 and is widely forecast to grow by 1.5% this year, and unemployment has fallen from a peak of 13% to 11.3%. Surveys show business and consumer confidence has rebounded—indeed, consumer confidence is at its highest levels in more than a decade.

But is this simply a cyclical bounce resulting from European Central Bank money-printing, a devalued euro, cheap oil and looser fiscal policy? And to what extent is it attributable to long-term structural shifts, aided by Prime Minister Matteo Renzi’s reform program?

These questions matter because if the fourth-largest economy in the European Union is genuinely in the midst of a sustainable recovery, that could have positive spillovers for the rest of the continent. But if the country with the heaviest public debt burden in Europe, at 133% of gross domestic product, is at risk of a slide back into recession, that could reignite doubts about Italy’s long-term debt sustainability, with could destabilize the whole eurozone.

The good news is that whether the recovery is structural or cyclical, it is primarily domestically driven and doesn’t appear to hinge on the fortunes of the global economy.

The Bank of Italy, for example, last week kept its 2016 forecast of 1.5% growth unchanged in the expectation that a stronger-than-expected recovery in consumer spending will offset any weakness in exports. Its models suggest little direct impact from slower growth in China on the Italian economy.

The bad news is that growth of 1.5% is hardly the robust recovery that one might expect in an economy that has lost nearly 10% of GDP since 2008. Spain and Ireland bounced back much quicker from their crises. Italy’s weaker recovery reflects deep structural problems accumulated over two decades, resulting in years of stagnation even before the global financial crisis.

Mr. Renzi has made more progress in tackling these structural problems in the past two years than his predecessors managed over the past 20.

True, many of his reforms haven’t gone as far as many would have liked. For example, a new labor contract introduced last year as part of a flagship labor reform designed to encourage employers to create more permanent jobs only applied to new employees and excluded public sector workers. Similarly, the government has cut spending through efficiency savings and pay freezes, but balked at cutting jobs.

Nonetheless, Mr. Renzi’s reforms are already having some impact. The Bank of Italy’s analysis concludes that about half the increase in permanent jobs can be attributed to government action. And the spending freezes have created the fiscal space for tax cuts, which have for the most part been well-targeted on reducing payroll taxes, creating incentives for new hirings and corporate investment.

There have also been other less headline-grabbing but still economically important reforms, including moves to speed up the process of civil justice, cut trial times, reform insolvency law, simplify licensing procedures and remove legal obstacles to banking consolidation.

Even so, it could be years before the full impact of Mr. Renzi’s reforms becomes apparent. The experience of countries such as Germany and Spain is that reforms work with a lag. Meanwhile, the task of overhauling Italy’s stagnant economy—and changing attitudes and behaviors—is sure to be the work of a generation, not two years.

In the near-term, the greatest contribution of the reforms to the current recovery has been the impact on confidence, convincing both international investors and domestic spenders that there really is a political commitment to reform.

But that points to risks ahead. It suggests that sustaining the recovery hinges on sustaining that confidence. That, in turn, puts the spotlight on Italian politics in what is going to be a busy year.

Mr. Renzi’s Democratic Party, which has slipped in the polls since it won 40% of the votes in the 2014 European Parliament elections, is likely to face a strong challenge from the populist 5 Star Movement in this spring’s municipal elections. Mr. Renzi has also promised a referendum in October on a package of constitutional reforms designed to transform the capacity of the Italian political system to take and implement decisions.

If he loses, he’s promised to quit politics; if he wins, many expect he will call a general election in the spring of 2017.

Can Mr. Renzi keep up the reform momentum—and thereby maintain the confidence necessary to sustain the recovery—ahead of so many electoral challenges? He talks the reform talk but is he really willing to risk the inevitable clashes with vested interests?

To the alarm of some observers, he has instead in recent weeks turned his fire on the European Commission, demanding it relax Italy’s budget targets to allow Rome to run a bigger deficit to pay for politically popular tax cuts, which risks raising questions about Italy’s commitment to cutting its debt burden.

Mr. Renzi has proved on many occasions that he isn’t a politician to be underestimated. More than his own fortunes are riding on how successfully he navigates the challenges of the next year.