Italy: A Daunting Path to Prosperity

PISA, Italy — Six years ago, the Swedish retail giant Ikea planned a 60-million-euro megastore just a few miles from where the Tower of Pisa leans into the earth. Backers said the huge construction project, new roads and wave of shoppers would bring hundreds of sorely needed jobs to this bucolic corner of Tuscany.

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But things got tangled — as they often do in Italy, where bureaucracy and politics can easily overwhelm economics.

Each application that Ikea filed seemed to require yet another. Each mandatory impact study begat the next. By May, when a local mayor had still not decided whether the company could get a building permit, Ikea put out word it would abandon the plan.

As Italy teeters on the edge of the European debt crisis, it can ill afford more debacles like that one. Otherwise, despite having the world’s seventh-largest economy, Italy may have little hope of outgrowing the staggering debt load that could threaten its financial future — and that of the euro monetary union.

Already, investors seem skeptical whether Italy and other debt-saddled European countries can right themselves, despite the financial rescue plan for Greece that Europe’s leaders agreed to last week.

On Thursday, Italy’s borrowing costs jumped almost a full percentage point at an auction of 10-year bonds, compared with just one month ago. At 5.77 percent, the interest rate was more than twice what financially buoyant Germany must pay on bonds of the same maturity. As higher interest rates make it even harder for Italy to reduce its debt, the main recourse would seem to be faster growth.

“This is the only major issue for Italy now — to resume growth,” said Francesco Giavazzi, an economics professor at Bocconi University and a research fellow at the Center for Economic Policy Research in London.

Italy must not only encourage big corporate investments like the Ikea project, experts say, but it must also remove impediments that stifle growth in the thousands of small and medium-size companies that make up the backbone of its economy.

One small-business man, Mauro Pelatti, says he has given up on expanding his business in Florence, an hour east of here. “Bureaucracy is so strong, and taxes are so high, that it’s virtually impossible,” said Mr. Pelatti, whose privately held company, Omap, makes parts for steel-stamping machines used on products like Vespa scooters.

Italy’s economy experienced paltry growth starting in the late 1990s, when the country’s manufacturing was overtaken by competitors in Asia. Then came the global financial crisis in 2007, which shrank Italy’s economy by more than 6 percent.

Growth has resumed, but the International Monetary Fund predicts “another decade of stagnation,” with Italy’s gross domestic product expanding by only about 1.4 percent annually in the next few years. (The German economy, Europe’s growth leader, grew 3.5 percent in 2010 and grew by 1.5 percent in the first quarter compared with the same period a year ago.)

Hindering growth is Italy’s heaving government debt, which at 119 percent of gross domestic product is second only to Greece’s among euro zone members. Although it has run a budget surplus, minus debt costs, for several years and recently passed a 48 billion deficit-reduction plan, the Italian government now spends 16 percent of that budget on interest payments — a bill that will rise if investors and creditors continue to fear that Italy cannot escape Europe’s debt crisis.