Italy: Labor Worries Could Cripple the Upturn

Italy's recovery is getting off to a slow start. What's more, potential labor strife threatens to dampen the rebound even further.

After its real gross domestic product fell at an annual rate of 0.8% in the fourth quarter, Italy struggled to grow in the first quarter and will likely expand a mere 1% to 1.5% this year. Consumer spending is healthy, helped by rising wages and a jobless rate that slipped to a two-decade low of 9.2% in the first quarter (although that rate remains above the average 8.4% for the 12-country euro zone). Exports, which fell 2.8% in 2001, are also expected to contribute to economic growth this year.

So far, the data on the euro zone's fourth-largest economy have been mixed. Retail sales fell in February for the first time in five months, and the April purchasing managers' index slipped slightly, dragged down by weakness in output and orders. But business confidence in April rose to a 15-month high (chart). Companies expect to boost output in coming months as demand picks up.

Mixed data are not unusual when an economy is turning in a business cycle. But what complicates Italy's outlook is the uncertainty on the labor front. The coalition government of Prime Minister Silvio Berlusconi campaigned on a platform of job creation. Now, Rome wants to reform labor laws, including making it easier to fire workers and change unemployment benefits and pensions. The goal is to create at least 1.5 million new jobs by 2006.

Organized labor, however, protests that the reforms are the first step in dismantling the rigid negotiation structure between the unions, the government, and the industry group Confindustria. Workers already went on a one-day strike on Apr. 16. Another labor action is threatened, perhaps in the summer.

Both the government and the unions have much at stake, so the battle could be a long one. Until a compromise is reached, the prospect of more work stoppages will worsen the outlook for Italy's recovery.

By James C. Cooper & Kathleen Madigan

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