Can Italy Stave Off An Economic Collapse?

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Illustration by Jon Krause for TIME

In early May, while the streets of Athens dissolved into violence, the Italian capital provided a very different scene. Instead of rioters, firebombs and tear gas, there were tourists, souvenir stands and the smell of slowly stewing garlic. The stock market may have been panicking over Greece and fretting over Spain, Portugal and Ireland, but investors continued to express their confidence in Italy by buying up its bonds. Rome, it seems, had dodged the financial bullet.

But bullets aren't the only things that kill. In Italy, the better analogy might be cancer. Increasingly uncompetitive in an ever more globalized world, the country suffered in stagnation long before the current continent-wide crisis. The government is deep in debt, so much so that it was one of the few in the developed world that didn't roll out an extensive stimulus plan. And while that decision has left the national balance sheet looking stronger in comparison with, say, Spain, Portugal or Ireland, it has also meant Italy's economy has fallen harder than most. Since the spring of 2008, gross domestic product has shriveled 6.5%. And its recovery is expected to drag.

What Italy really needs is an economic overhaul. The country's regulations are centered around protecting privilege, not expanding opportunity, and they haven't kept up with modern times. Not only has this stifled growth, it risks insulating the country from immediate injuries while the long-term damage continues unchecked. Other countries — Greece, most notably — are having reforms thrust upon them (hence all those rioters). In Italy la vita has remained for the most part far too dolce. "A crisis creates acute pressure and acute pressure creates change," says Marco Annunziata, chief economist for UniCredit, Italy's largest bank. "A slow bleed is hardly felt. But it happens nonetheless."

Perhaps nowhere is the problem more visible than in the labor market. Union victories in the 1960s and 1970s won Italian workers some of the most robust rights in the world. Fixed employees enjoy generous unemployment, extended maternity and paternity benefits, automatic annual raises and protection against being fired for all but the most egregious offenses. But while the laws haven't changed, the market has found a way around them. In the past decade, the number of workers without regular contracts — freelancers, employees on continuously rolled-over short-term assignments — has soared. "By law, we're considered a type of anomaly, an exception," says Salvo Barrano, president of the May 20 Association, which advocates for these types of workers. "But, really, the exception has become the fixed employee." Meanwhile, in a country where it's not uncommon for a lawyer or a doctor to ask for payment under the table, the black labor market — which makes up 30% of the economy, as compared to less than 20% in Spain — has continued to expand.

The result is a de facto and very much unofficial reform — but one that's likely to be unproductive and ultimately harmful. Italy has created a two-tiered labor market, which overprotects workers in formal positions but leaves everybody else dangerously exposed. "The rights are tied to the job, not to the person," says Barrano. The more flexible labor force may have been a boon while the economy was stable, but in the current crisis, it has left the workers who will be building the country's future — its immigrants and its young — without the protection that would have allowed them to retool for the new global reality. "There's no proper unemployment insurance, except in the big firms," notes Marco Fugazza, an economist at the U.N. Conference on Trade and Development.

If the pain has yet to make itself fully felt, it's because those in the top tier — generally the older generation — have been able to bail out their children with one of the highest levels of private savings on the continent. "My social safety net was provided by my father, not by the state," says Giovanni, an out-of-work archaeologist who asked to be identified only by his first name. "It's embarrassing. I'm 35 years old. I'm married. And I still have to ask my parents for money." If Greece is a country that has burst its budget, Italy is one that is living off the savings of its citizens. The question is how long it can continue to do so, and whether the government will take action before the slow bleed blossoms into total hemorrhage. "The wealth is starting to run out," says Annunziata. "We're going to see a gradual erosion of living standards." It's time to cut back on la dolce vita.