Italy Threatens Europe's Fragile Recovery

Across much of Europe, 2013 was the year that the economic news finally started looking a little brighter. But in Italy, the euro currency zone’s third-largest economy, it’s been a year of wasted opportunity.

Since former Prime Minister Mario Monti announced his resignation last December, the country has lurched from one political crisis to the next. The result: “Necessary structural reforms are not kicking in at all,” Anatoli Annenkov, an economist at Société Générale in London, told Bloomberg News.

Italian workers have paid the price for political gridlock, with joblessness rising from an already-painful 11.2 percent in December to an estimated 12.3 per cent in September, the highest rate in more than 35 years. Economists surveyed by Bloomberg expect the unemployment rate to hit 12.4 per cent in 2014.

While the euro zone pulled out of recession in the second quarter of the year, Italy’s economy shrank 0.3 per cent. Italy’s problems with sluggish growth date back more than a decade, and have left it with the highest debt burden, as a percentage of gross domestic product, of any European country but Greece.

Prime Minister Enrico Letta is backing measures that could give growth a boost, such as tax simplification, regulatory reform, and modernization of the justice system, Finance Minister Frabrizio Saccomanni said in a letter published today in the Financial Times. But after taking office a full two months after inconclusive elections, Letta has spent much of his time fighting political brush fires, most recently surviving an Oct. 2 confidence vote after former Premier Silvio Berlusconi threatened to bring down the government.

The quagmire in Italy could derail Europe’s still-fragile economic recovery, European Central Bank Executive Board member Joerg Asmussen warned in a speech in Milan on Oct. 25. “The euro area cannot prosper if its third-largest economy has a potential growth rate of zero.”