Addio, Dolce Vita

AT FIRST blush, life in Italy still seems sweet enough. The countryside is stunning, the historic cities beautiful, the cultural treasures amazing, and the food and wine more wonderful than ever. By most standards, Italians are wealthy, they live for a long time and their families stick impressively together. The boorish drunkenness that makes town centres in many other countries unpleasant is mercifully rare in Italy. The traffic may be bad, and places such as Venice and Florence are overrun by tourists, but if you go off-season—or merely off the beaten track—you can have a more enjoyable time in Italy than practically anywhere else.

Yet beneath this sweet surface, many things seem to have turned sour. The economic miracle after the second world war, culminating in the famous 1987 sorpasso (when Italy officially announced that its GDP had overtaken Britain's), is well and truly over. Italy's average economic growth over the past 15 years has been the slowest in the European Union, lagging behind even France's and Germany's (see chart 1). Its economy is now only about 80% the size of Britain's. Earlier this year Italy briefly tipped into recession; for 2005 as a whole, its economy is likely to be the only one in the EU to shrink. Growth next year is expected to be anaemic at best.

Italian companies, especially the small, family-owned firms that have been the backbone of the economy, are under ever-increasing pressure. Costs have risen, but productivity has remained flat or even declined. Membership of the euro, Europe's single currency, now rules out devaluation, which for many years acted as a safety-valve for Italian business. Italy's competitiveness is deteriorating fast, and its shares of world exports and foreign direct investment are very low. The World Economic Forum in its annual competitiveness league table recently ranked the country a humiliating 47th, just above Botswana. The economy has also proved highly vulnerable to Asian competition, because so many small Italian firms specialise in such areas as textiles, shoes, furniture and white goods, which are taking the brunt of China's export assault.

Down at heel

The effects of decline are starting to show. Increasing numbers of Italians are finding their living standards stagnating or even falling. The cost of living is widely believed to have risen sharply since euro notes and coins replaced lire in January 2002. Property prices have certainly shot out of reach for many first-time buyers in Rome, Milan and even Naples. Many Italians are cutting back on their annual holidays, or even going without. Others are putting off buying new cars or even new suits, a real deprivation for such design-conscious people. Supermarkets report that spending now falls in the fourth week of every month before the next pay cheque arrives, a sure sign that families are struggling to make ends meet.

A lacklustre economy is causing broader problems too. Italy's infrastructure is creaking: roads, railways and airports are falling below the standards of the rest of Europe, and public and private buildings are looking ever shabbier. Educational standards have slipped: the country comes out badly in the OECD's PISA cross-national comparisons, and no Italian university now makes it into the world's top 90. Spending on research and development is low by international standards.

Italy has also suffered more than its fair share of corporate scandals, notably the bond default by Cirio and the collapse of Parmalat. And the public finances are in a shambles. Respectable estimates put the underlying budget deficit for next year, ignoring one-off measures, at 5% of GDP, way above the 3% ceiling set by the euro area's stability and growth pact. The public debt stands at over 120% of GDP and is no longer falling.

Even Italy's social fabric is coming under strain. The family remains strong and divorce rates are relatively low. But the fact that 40% of Italians aged 30-34 are reportedly living with their parents is not just a happy sign of family harmony or attachment to mamma's cooking. Many young Italians stay at home because they cannot find work or because they do not earn enough to afford a place of their own.

Social trust, a concept that is admittedly hard to measure, seems unusually low in Italy—one reason, perhaps, why family firms have always played such a big part in the economy. And respect for the rules, and even the law, never high, appears to have fallen further in recent years. Both tax evasion and illegal building, encouraged by repeated amnesties, seem to be on the rise. Organised crime and corruption remain entrenched, especially in the south.

To cap it all, Italy's demographics look terrible. The country has one of the lowest birth rates in western Europe, at an average of 1.3 children per woman, and the population is now shrinking; yet Italians are living ever longer, so it is also ageing rapidly. The economic consequences—too many pensioners, not enough workers to maintain them—are worrying enough on their own. What makes them worse is Italians' low rate of participation in work. Only 57% of those in the 15-64 age range are in employment, the smallest proportion in western Europe. Germany, by comparison, has an employment rate of 66%, and Britain one of 73%. Although overall unemployment in Italy is not too bad by west European standards, it is disturbingly high among the young and in the south.

Berlusconi's legacy

What has gone wrong with the Italian economy, and how can it be put right? These are the main questions this survey will seek to answer. But it will do so in the context of Italy's unruly political scene. Silvio Berlusconi's centre-right government, elected in May 2001, seems likely to manage the rare feat of staying in office for a full term (ending next spring)—a first for a post-war government in Italy. Mr Berlusconi is immensely proud of this. But he has much less to be proud of when it comes to the economy. In his 2001 election campaign, he promised to apply the business acumen that had helped him to become Italy's richest man to make all Italians richer. This he has conspicuously failed to do.

The Economist's view of Mr Berlusconi is well known. We declared in April 2001 that he was unfit to lead Italy, because of the morass of legal cases brought against him at various stages of his business career and because of the conflicts of interest inherent in his ownership of Italy's three main private television channels. Almost five years on, he still faces legal problems (of which more later), and he has done little to resolve his conflicts of interest: indeed, because the government owns RAI, the state broadcaster, Mr Berlusconi now controls or influences some 90% of Italian terrestrial television (which does not stop him complaining about his critics on TV). Our verdict of April 2001 stands.

Yet, as we acknowledged at the time, in 2001 there was nevertheless a case to be made for electing Mr Berlusconi's centre-right coalition. Italy badly needed a dose of pro-market reforms, liberalisation, privatisation, deregulation and a shake-up of the public administration, all of which Mr Berlusconi had promised. He even pledged to cut taxes. A majority of Italian voters, backed by much of Italian business, were willing to overlook both his legal entanglements and his conflicts of interest and give him a chance to reform the country. But as the next election approaches, very little of what he promised has been delivered, so many of his erstwhile supporters are feeling disillusioned.

Even the apparent political stability that Mr Berlusconi has fostered is deceptive. His six-party centre-right coalition has come close to collapse more than once, usually thanks to squabbling between Umberto Bossi's Northern League and Gianfranco Fini's National Alliance. Last April a row with a smaller ally, the Union of Centre and Christian Democrats, forced Mr Berlusconi to resign and form a new government.

On current form the centre-left opposition under Romano Prodi looks the likeliest victor in the election planned for April 9th 2006. But even if he manages to win, Mr Prodi will find it hard to introduce reforms—not least because his coalition embraces no fewer than nine parties, several of which will obstruct change. It was an ally of Mr Prodi's, Fausto Bertinotti, and his unreconstructed Communists that pushed him out of office in 1998. In truth, neither of the two main groupings in Italian politics offers much hope to those who believe that the country needs radical (and painful) reform.

Yet Italy is approaching a crunch. Rather like Venice in the 18th century, it has coasted for too long on the back of its past success. Again like Venice, it has lost many of the economic advantages which underpinned that success. For Venice, it was a near-monopoly on trade with the East that paid for the creation of its beautiful palaces and churches; today's Italy has benefited hugely from a combination of low-cost labour and a switch of workers away from low-productivity farming (and the south) into manufacturing (mostly in the north). But such good things invariably come to an end.

That is what happened to La Serenissima at the end of the 18th century. Venice was contemptuously swept away by Napoleon, and the last doge voted himself out of office. The serene republic is now little more than a tourist attraction, however beguiling. Could this become the fate of Italy as a whole?