Dire economy means bleak prize for next Italian government

Italy's chronically weak economy is in such dire straits that the parliamentary election tomorrow and Monday could well be a good one to lose.

Italy's electoral system is a recipe for another weak, unstable government - and, with the economy set to deteriorate further, it can be expected to lose popularity just as fast as all its recent predecessors.

"It's going to be nasty for whoever wins the election because the outlook is gloomy and the problems in Italy are so entrenched that nothing can be done in the short term," Bank of America analyst Gilles Moec said.

In these circumstances, a probably brief spell in opposition may be a blessing in disguise for the loser of the vote pitting conservative media tycoon Silvio Berlusconi against former Rome mayor Walter Veltroni, who leads the centre-left.

By the time the next ballot comes around, the worst of the global downturn may be over. More importantly, the backlash from disaffected Italians may have finally persuaded politicians to change the voting system to permit stable, cohesive government.

While most of the eurozone is showing some resilience in the face of a surging currency and record high oil prices, Italy is close to recession, worsening a trend which has seen it underperform its main partners for at least a decade.

Romano Prodi's outgoing government last month slashed its growth forecast for this year to 0.6 per cent from 1.5 per cent, and the International Monetary Fund sees Italy growing at just half that rate.

The outlook makes a mockery of the familiar election promises of tax cuts and handouts made by both Mr Berlusconi and Mr Veltroni.

"The budget deficit is already set to rise this year so there will be hardly any room for manoeuvre after the election," said Tito Boeri, economics professor at Milan's Bocconi University. "Everyone knows the promises are empty ones."

The situation would not be so serious if Italy were just following its trading partners through a normal cyclical downturn, but the problems of the eurozone's third largest economy run far deeper.

An incomplete list includes outdated infrastructure, a weak education system and under-qualified workforce, an ageing population, a fragmented political system, inefficient state bureaucracy, organised crime, a low employment rate, a slow legal system, huge public debt, low wages and low productivity.

Many of these are interlinked, but analysts say low labour productivity and the public debt are probably the most crippling for the economy. And the political system, a recipe for policy inertia, prevents them from being tackled.

There are many reasons Italians have failed to increase output per hour worked like their competitors, including a rigid labour market and a predominance of small firms unable to invest in high technology.

"To boost productivity we have to change job protection rules and centralised wage negotiations," said Mr Boeri. "These are a disincentive for companies to hire, expand and invest."

Firms must pay the same rates in the south of the country, where living costs are much lower, as in the rich north, and they are loath to hire permanent workers because they cannot fire them in a downturn, analysts say.

Italy's public debt, the third largest in the world, is an inheritance from the free-spending governments of the 1980s.

It amounts to more than the gross domestic product and forces the country to pay some €70 billion per year in interest, drastically reducing the scope for expansionary policies like tax cuts or public investment.

In these conditions, the country desperately needs a strong, decisive government to curb unproductive public spending, cut the debt and pass overdue but unpopular reforms.

But voting rules that have spawned dozens of tiny yet influential parties and a constitution giving parliament power at the expense of the prime minister mean that is just the sort of administration most Italians have never known.