The euro's Achilles heel

ITALY'S public debt is the sleeping dog of the euro zone's crisis. So far the markets have mostly let it lie. Although in 2010 it rose by three points, to 119% of GDP, Silvio Berlusconi's finance minister, Giulio Tremonti, held the budget deficit to an impressive 4.6%, well below his target of 5%. His firm hand has saved Italy from being lumped with the euro-zone's PIGS: Portugal, which has just asked for a bail out (see article), Ireland, Greece and Spain. “With our feet on the ground, one step after another, the Italians and Italy are going in the right direction,” Mr Tremonti has said.

Explore our interactive guide to Europe's troubled economies

He was speaking after figures showed faster-than-expected growth in 2010. Yet the revised number was not reassuring. After shrinking by 5.2% in 2009, GDP inched back to 1.3% growth last year. But the euro zone as a whole grew by 1.7%, with Germany alone growing by almost 4%. Mr Tremonti is unabashed. Speaking to the Ambrosetti financial forum on April 2nd, he conceded that Italy would grow slightly more slowly than Britain and France this year, but added that were he running as big a budget deficit as these two, it would be growing faster.

In fact the euro crisis has again laid bare the structural weaknesses in Italy's economy. When euro-zone GDP falls, Italy's falls by more; when it rises, Italy's rises by less (see chart). The country has too few big firms. It is not generating jobs for the young: more than a fifth of the country's 15- to 29-year-olds neither work nor study. Too few women have jobs (in the euro zone only Malta has a lower female-participation rate). The south remains a huge drag: in broad terms, GDP in the north may grow by as much as 3% a year, but in the south it shrinks by 2%, pulling the average down. Youth unemployment in parts of the south is 40%. And, as the Bank of Italy's governor, Mario Draghi, has noted, Italian entrepreneurs have to cope with an unusually high level of organised crime. Police operations show that the 'Ndrangheta from Calabria has burrowed deep into the economic fabric of the north.

Stefano Manzocchi, an economics professor at LUISS University in Rome, says the government is “looking at a rather flattering still photograph, instead of seeing the film. Italy is a rich country, but one which is not showing it can keep up the flow of income that feeds its wealth. What is really missing is a vision of what this country could be in ten or 15 years' time.” There is little chance of such a vision emerging soon. Mr Berlusconi has just gone on trial in the last of the cases in which he is a defendant (see article). He plans to spend a day a week in court; more time will doubtless be spent with his lawyers.

The employers' federation, Confindustria, frets that higher oil prices, rising interest rates and a strong euro could derail the recovery. Giving evidence to a parliamentary committee, its director-general, Giampaolo Galli, appealed for policies to boost competitiveness. The risk if nothing happens is that Mr Tremonti's good work on the public finances could be undone.