European economic crisis: Why Italy is seen as too big to bail out

While Italy has a fairly low budget deficit, structural issues such as low productivity have resulted in an economic crisis. Its public debt, at 118 percent of GDP, is one of the highest in Europe.

By , Correspondent

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    European economic crisis: Traders work on the floor of the Frankfurt stock exchange on Friday, Aug. 5.
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Italian politicians are hardly known for being prompt, or for sticking to plans. Yet when Prime Minister Silvio Berlusconi announced a series of economic reforms aimed at reassuring markets, Europeans leaders were quick to welcome them as “crucial measures” to avoid a crisis that would threaten the stability of the whole European Union: Italy's default.

Following advice from the European Central Bank, Prime Minister Berlusconi vowed on Friday to approve labor reforms in September and to achieve a balanced budget by 2013. On Monday a joint statement by German Chancellor Angela Merkel and French President Nicolas Sarkozy welcomed the plan as “crucial.” They also stressed the necessity to “implement the announced measures as soon as possible and in a complete manner.”

Since Standard & Poor downgraded its credit rating outlook last May, Italy's public debt has been under constant attack from international markets, fostering speculation about the country's possible default. Wealthier eurozone nations such as Germany and France, already strained by the effort to save other embattled nations such as Greece and Portugal, appear deeply concerned about Italy's economic woes.

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“They are so worried because Italy is too big to be saved,” says Tonia Mastrobuoni, an economic journalist at La Stampa newspaper. “As opposed to Greece and Portugal, we have no alternative but saving ourselves.”

Ms. Mastrobuoni argues that Italy's difficulties have their roots in structural problems such as low productivity rather than financial turmoil. Italy's budget deficit, currently at 3.9 percent of GDP, is already one of the lowest in the eurozone – although it is still higher than the 3 percent allowed under EU regulations. “The problem is that Italy's economy hasn't been growing for more than a decade, and all of a sudden the international markets seemed to have realized it,” says the journalist.

Recently a prominent Italian entrepreneur, Emma Marcegaglia, described the early 2000s as “the lost decade” for the economy. Mastrobuoni, who has coauthored a book on the subject, blames the lack of growth on the rigidity of the labor market, which she describes as having a double standard.

“On one hand there are over-protected old employees, who are not urged to be productive in any way," she says. "On the other hand, there are young workers, tied to temporary contracts with no career prospective.”

Traditionally, Italian families have been big savers, thus the country has a low private debt. Yet its public debt, at 118 percent of GDP, is one of the eurozone's highest, mostly built in the 1980s by a series of governments that implemented huge public spending they could not afford.

Under the socialist government of Bettino Craxi (1983-87), for example, public workers could retire as early as 35. After a series of corruption scandals, Craxi left the country to avoid prosecution and died in exile in 2000.

Since then, governments of all colors vowed to curb the public debt, but few succeeded. “All they managed to do in order to reduce the debt is to raise taxes,” says Mastrobuoni.

The economic journalist doesn't share France's and Germany's apparent enthusiasm over Berlusconi's announced reforms. “The government's plan has no credibility, for keeping raising taxes alone doesn't help," she says, advocating instead moves toward a more free-market capitalist system. "What we need is liberalizations.”

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