Italy, its finances strained by a fractious government coalition's desire to reconcile election promises with EU stability pact rules, is bedevilled by weak growth and finances that give it little room to manouvre.
Italy's predicted 2004 economic growth of 1.2 percent is among the lowest of the Group of Eight world's most industrialized countries.
The International Monetary Fund (IMF) cut its 2005 growth forecast to 1.7 percent from 1.9 percent earlier this month, well below the European Union average of 2.2 percent. Italy's government is banking on 2.1 percent growth in 2005.
"On the one hand, consumer confidence has regained some ground and so has domestic demand, although signs of recovery are at an early stage," a recent study by the investment bank Morgan Stanley said. "On the other hand, the economy has failed to re-emerge from a four-year
long manufacturing recession that raises doubts about the long-run competitiveness of the country. We believe that this dichotomy may well stretch into the year ahead."
The underground economy represents between 15 and 16 percent of gross domestic product (GDP), or around 190 billion euros (250 billion dollars) in lost revenue for the state, according to the national statistics institute ISTAT.
And structural measures insisted upon by international institutions have also hit public finances hard.
The government has already had to adopt a corrective budget totalling 7.5 billion euros in July to keep its public deficit below 3.0 percent of GDP as stipulated by the EU's Stability and Growth Pact.
The IMF recently gave Rome an early warning about its public deficit for next year. The Berlusconi government has set a deficit target of 2.9 percent in 2004 dropping to 2.7 percent in 2005, but the latter is dependant on a 24 billion euro cost-cutting budget.
While Italy is not the only eurozone country at risk of breaching the stability pact's deficit limit, Rome has a much higher public debt than its EU partners -- around 106 percent of GDP over the past four years, while the pact sets a limit of 60 percent.
Bank of Italy governor Antonio Fazio's assessment before a parliamentary hearing last month was stark: "The public account situation that emerged at the middle of the year is serious."
He said any cut in taxes must be offset by public spending cuts, "otherwise the situation isn't sustainable", and added that in the medium-term the public sector would have to face structural reforms to guarantee spending containment. Meanwhile, both employers and unions have been up in arms over the state of the economy.
"When a country has declining tourism, a rate of production which is flat or less than that of other countries, like France and Germany which we can say are not performing too well either, you have to be concerned," Confindustria chief Luca Cordero Montezemolo said recently.
The government is nonetheless likely to go on insisting that things are not all that bad, pointing up the dynamism of Italy's myriad small and medium-sized businesses, an unemployment rate which is down to 8.1 percent, and modest 2.0 percent inflation.
By: N. Peter Kramer
