Economic, political paralysis threatens Italy

By David Mchugh

Associated Press

Published: Tuesday, Nov. 8 2011 6:15 a.m. MST

A price tag is displayed on a market stall in Rome, Monday, Nov. 7, 2011. Italy's borrowing rates spiked to a new euro high Monday and talk of early elections grew, as pressure mounted on Premier Silvio Berlusconi to resign so a new government could pass the economic reforms that Italy needs avoid a financial disaster.

Pier Paolo Cito, Associated Press

MILAN, Italy — In the 1990s Italy made a mighty effort to shape up its hidebound economy and qualify for the euro. Then it slacked off — and now it is under pressure to make up for a lost decade's worth of reforms to convince markets it can pay its debts.

The size of its huge debt pile, about 120 percent of annual economic output, is nothing new. The problem is that because of the past two years of market turmoil in Europe, investors are suddenly reconsidering countries' abilities to repay their debt.

And as they take another look at Italy, they don't like what they see — dismally low growth that politicians have so far proved incapable of reviving.

The situation has become critical as investors lose faith in the eurozone's third-largest economy and charge more to lend it money. Italy is too big to be bailed out like Greece, Ireland and Portugal were. A default on its €1.9 trillion ($2.6 trillion) in debt would threaten the euro and the global financial system with collapse.

It didn't have to come to this. Unlike much smaller, bankrupt Greece, Italy has a big, modern and industrialized economy that can actually make things people abroad want to buy — think Fiat, Gucci, Benetton.

Its budget deficit, this year at 4 percent of GDP, is below the eurozone average of 6 percent and it aims to balance government spending by 2013.

But the country still has the world's third-largest debt pile and the worry is that it is no longer productive enough to keep paying it off.

Italy's economy is hampered by high wage costs, low productivity, fat government payrolls, excessive taxes, choking bureaucracy, and an educational system that produces one of the lowest levels of college graduates among rich countries.

Its economic output last year was 1.8 percent smaller than in 2005, adjusted for inflation. The International Monetary Fund projects anemic growth of 0.6 percent this year and 0.3 percent next year.

Economist Tito Michele Boeri, a leading expert on Italy's labor market at Milan's Bocconi University, says the economy underperforms because its restrictive labor laws and sluggish educational system leave large groups of people, particularly the young, languishing without well paid jobs or training that would make them more productive.

"There is a serious problem with the way we use human capital in our country," he said.

Established workers with seniority enjoy strong protections against being laid off and get extensive severance if they do. Meanwhile, new entrants into the labor force face low wages and temporary contracts that mean they can easily be fired. Companies do little to train them, treating them as temporaries.

University education can take years longer than in other countries, with five years of study for a basic credential and several more for professional specialization. Lawyers in Italy must do a two-year apprenticeship, and most firms get free labor out of the trainees, many of whom don't even get expenses reimbursed.

The long education path is a deterrent that means only 20 percent of people between 25 and 34 have a university degree. That leaves Italy 34th of 37 industrialized countries surveyed by the Organization for Economic Development and Cooperation.

One Italian in four under 30 is not in education, employment, or training.

The universities themselves contribute little to the economy. No Italian university made the Times Higher Education list of the world's top 200, and while Italy has prominent scientists and researchers many of them work abroad, where research grants and investment are easier to come by.

A whole list of trades and professions is protected, with entrance restricted and often based on connections: notaries, taxi drivers, pharmacists. The system discourages competition and limits opportunity.

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