Even if a durable political coalition existed to enact austerity measures, there is concern that they will trigger the kind of fierce public backlash that has swept Greece in recent months. Kindling those concerns are Italy’s labor unions, who for years have threatened to thwart any attempt to reform Italy’s labor laws or to trim the country’s bloated welfare state. It is not an idle threat. Back in September, the Italian General Confederation of Labor, Italy’s largest trade union, organized a nationwide strike to protest the government’s passage of an austerity package. Thousands of protestors poured into the streets and effectively shut down the country, disrupting everything from public transportation to hospitals and schools, along with other government services. The prospect of violent Greek clashes replaying themselves on the streets of Rome and Milan may be enough to keep any Italian government from pushing ahead with the kind of reforms that the country so urgently needs.
Ultimately, that inaction is the greater worry. Unaddressed, Italy’s massive debt will trigger a fresh round of panic through Europe’s already fragile markets. In the worst-case scenario, Italy will seek a bailout. Europe would then struggle to come up with a rescue package that large, leading to the possibility of a default that could break up the 17-nation Eurozone and drag down the global economy. Both scenarios are terrifying. As one analyst recently put it: “Italy is too big to fail, too big to save.”
There is still a chance that it may not come to that. For the time being, Italy has been placed on a kind of fiscal probation. The International Monetary Fund is monitoring to make sure that the country puts in place reforms to balance the budget by 2013 and encourage economic growth. Still, there is little immediate cause for optimism. The high-profile showdown over Berlusconi’s government notwithstanding, Italy’s problems are not only political. They are also cultural and structural. In the long run, only a far-reaching economic reform agenda and a government willing to see it through in the face of popular discontent will bring the country out of its debt crisis. Neither has emerged to date.
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