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Italy’s Biggest Economic Problem? It’s Still Italy

NAPLES, Italy — Whatever hopes there were that a radically unconventional government might jolt Italy out of its economic torpor have mostly given way to bitter resignation that, in this country, nothing ever seems to change.

More than a year since Italy handed power to a coalition of two fractious partners — the right-wing populist League and the anti-establishment Five Star Movement — the economy is suffering the strain of ceaseless political acrimony.

And now the histrionics appear on the verge of producing yet more chaos and uncertainty, as Matteo Salvini, leader of the League, on Thursday declared irreconcilable differences with Five Star and called for snap elections.

Companies are deferring expansions and limiting investment rather than risking cash in a time of uncertainty. The public debt remains monumental, running at more than 2 trillion euros ($2.24 trillion), or more than 130 percent of annual economic output.

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Banks are still stuffed with bad loans — albeit fewer than before — making them reluctant to lend. An economy that has not expanded over the past decade stagnated between April and June, according to recent data, while investment diminished. That kept Italy on track to grow not at all this year while reinforcing its claim on an unwanted title: weakest economy in Europe.

Early this year, the Adler Pelzer Group, a major Italian manufacturer, secured an order worth €2.6 million (nearly $3 million) to make parts for military aircraft. That spelled 250 new jobs at its factory outside Naples, the heart of perpetually troubled southern Italy.

“It was a great opportunity,” said Paolo Scudieri, the company’s chairman and a member of the board of Confindustria, Italy’s most powerful business association.

But the company recently shifted the work to a factory in Poland in reaction to the intensifying political chaos.

“The battle with the E.U. and the conflicts with the world have created problems of credibility for the Italian government,” Mr. Scudieri said. “They have created problems not just for my company but for all Italian companies and, most of all, for Italy itself. Whoever might like to invest in Italy now thinks twice.”

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Italy last month managed to defuse its most immediate problem, the risk of punishment from the European Union for breaching limits on its public debt. After threatening to impose fines, Brussels held off when some of Italy’s current spending plans proved less expensive than anticipated.

That achievement was celebrated in Rome as evidence that Italy can reduce its debts and avoid conflict with the European bloc.

“It was important to recreate trust in the markets, especially that families and companies believe that public finances are viable,” the Italian finance minister, Giovanni Tria, said during an interview in his cavernous office in Rome, where the stupendous ceiling frescoes could provoke jealousy at the Vatican.

“We have eliminated all possible discussion about our position in Europe,” Mr. Tria added. “We want to change the rules, but we are complying with the current rules.”

Yet more skirmishes with Brussels almost certainly lie ahead this fall as the government begins deliberating over next year’s budget. The League remains intent on adopting a so-called flat tax plan to reduce taxes. Paying for that would force Italy to cut spending or clash anew over European debt limits.

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“We will have to choose,” Mr. Tria said. “If you want to have fiscal reform in the direction of the flat tax, we have to cut expenditures.”

The trouble is that cutting spending deprives the economy of fuel for growth. Successive Italian administrations have emphasized the need for expansion in pleading with Brussels for permission to spend more than budget rules allow.

This has always been a tough sell, given that austerity-minded European officials are prone to view Italy as a mischievous teenager trying to pry loose the family credit card. It is a tougher argument now, with Italy run by a government whose leaders have frequently threatened to break with European orthodoxy.

The political turmoil has intensified in recent weeks in the wake of a report from BuzzFeed that advisers for the League met secretly with Russian officials seeking to improve the party’s prospects in this year’s European Union elections. Mr. Salvini has denied the report, while his Five Star counterpart, Luigi Di Maio, urged him to address Parliament. The latest trigger for hostility was Five Star’s opposition to a high-speed rail connecting northern Italy to France.

With the collapse of the government now a looming possibility, Europe’s fourth-largest economy remains stuck in a familiar quagmire.

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“It’s serial stagnation,” said Nicola Borri, a finance professor at Luiss, a university in Rome. “The economy doesn’t contract, it doesn’t grow. Italy is a country that is weak, that is old, where there is no investment in new ideas.”

Some business leaders argue that gloomy talk is masking strength, especially in industrial areas in the north of the country.

“The real economy in the country is so strong,” said Carlo Messina, chief executive officer of Intesa Sanpaolo, Italy’s second-largest bank by assets. “We will continue to be a very resilient country in any scenario.”

He dismissed the political drama as a sideshow. “Believe me,” he said, “in Italy, we are used to a political situation like this.”

The current government is in many ways the product of public dismay over Italy’s dismal economic performance. Five Star gained favor with promises for so-called basic income payments — cash grants for low-income people. They were especially appealing in the south of Italy, where joblessness forms the backdrop to everything. The League, now the dominant political force, captured votes with vows to halt the influx of migrants and to cut taxes.

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But the results have proved disappointing, a sentiment especially palpable in Naples, a glorious yet fading city on the Tyrrhenian Sea.

Hauntingly beautiful, its streets are pockmarked by deterioration. Teeming with ancient palaces, Naples is now colored with abandonment, as young people move north in pursuit of jobs. Mount Vesuvius — the volcano whose eruption buried Pompeii — towers over the landscape, a reminder that unseen pressures can explode.

On a recent morning, three dozen health care workers congregated outside a regional government building. They wore red hats emblazoned with the letters of their union, the CGIL, the largest in Italy. They blew shrill whistles. One wielded a bullhorn and tilted it skyward, shouting angrily at officials in offices above.

The workers were protesting the loss of 5,000 jobs in regional hospitals over the past decade, leading to shortages of doctors and nurses. The new government in Rome is uninterested, they said.

“Everyone sees that they fight every day among themselves and with the E.U.,” said the head of the local union branch, Marco D’Acunto. “But what we care about is what they do for the country and the region. And that is nothing.”

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In the working-class neighborhood of Montesanto — a warren of cramped apartments threaded by narrow, litter-strewn streets — unemployed workers gathered in an abandoned church seized by a makeshift community organization. They shared strategies for navigating the bewildering government benefits system.

Nationally, the unemployment rate sits near 10 percent — lower than a year ago, but roughly the same level as in 2012, in the aftermath of a brutal economic crisis. Many here say the crisis never ended.

“What was wrong before has just become wrong in a more stable way,” said Mimi Ercolano, a labor activist. “There are huge numbers of people who are working off the books, in the shadows of the economy. It’s a social cancer.”

Ten years ago, in the midst of the global financial crisis, Antonio Pastore lost the job he had held for two decades, restoring marble statues. He had earned about €1,200 ($1,349) per month. As orders disappeared, his employer pressured him to agree to work off the books, he said, enabling the company to avoid paying taxes. He refused, and was fired. That was the last time he has held a real job.

Mr. Pastore took temporary construction stints, working under the table for €20 per day. He moved back in with his parents.

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Now 45, he winced when asked if he has children.

“It’s not possible to have a family when you don’t have work,” he said.

Has anything changed since the populist government took over? Mr. Pastore scoffed. “It’s gotten worse,” he said. “It’s gotten harder to find a job, because so many companies are closing.”

Outside Naples, at a factory that made fruit baskets, the ax fell in March, ending paychecks for 117 permanent workers and 200 contractors. Some applied in vain for jobs at a nearby Fiat automobile plant, where the work force has declined to fewer than 5,000, from 15,000 in the 1970s.

Most jobless people do not qualify for basic income payments, because the rules bar grants for those drawing financial support from relatives. Five Star once pledged that some nine million people would benefit, but only 674,000 had qualified as of early June, according to the National Social Welfare Institute.

Thirty-five miles east of Naples, in the town of Avellino, Sabino Basso has halted plans to hire 30 more people at the olive oil bottling plant started by his great-grandfather.

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Mr. Basso’s company buys olive oil from growers in Italy, Spain and Greece, exporting 80 percent of its wares to countries around the globe — especially the United States, where Walmart is a major customer. He had planned to increase marketing and online sales.

But then Five Star tightened legal requirements for companies that hire workers on temporary contracts, effectively limiting stints to one year. The change was aimed at forcing businesses to hire permanent workers.

Mr. Basso was aghast. All but five of his 100 workers are permanent, he said. The others are apprentices, a status that has allowed him to hire using temporary contracts.

“In order to understand if I want to keep people their whole lives, I have to test them,” he said. The new rules did not allow him sufficient time. “I just stopped hiring.”

His sales in Italy have dipped 4 percent this year, a trend he blames on the noisy reality show that is Italian politics.

“When the television says the government is fighting with the European Union, and Salvini is fighting with Di Maio, it hits consumers,” he said. “Companies are looking for stability.”


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