Italy sees self as resilient to economic collapse

But even as Greece wins temporary respite from its debt crisis, Italy remains in the sights of the world's euro-skeptics for good reasons.

The chronically underachieving nation is saddled with public debt equalling a whopping 115 percent of GDP. The euro1.2 trillion economy contracted by 5 percent last year -- among the highest in the euro zone -- and is expected to grow only slightly this year.

Italian officials -- backed by economists -- insist that the country's high level of private savings, experience dealing with a long-running public deficit and prudent fiscal management in the recession have made it resilient to fears of collapse.

So while the economists and investors debate about whether the 'i' in PIGS -- the unkind moniker used to single out the sluggish economies and big deficits of Portugal, Italy, Greece and Spain -- really stands for Ireland, not Italy, or should be replaced by PIIGS, Italians may have a different take: In Italy, if you have a pig, make prosciutto.

Thus far, ratings agency Fitch doesn't seem too worried about Italy's prospects and indicated that the country's AA- rating is stable. While it shares some of Greece's afflictions -- like high debt, slow growth and even corruption, its borrowing costs are not as high.

And Italy's debt is of longer maturity and its spreads, or interest rate difference, over benchmark German debt are smaller than for Greece.

This is, after all, a country where the postwar period was marked by revolving-door governments whose rapid rises and falls hardly concerned the masses. And where people rely heavily on their families, who, thanks to Italy's postwar economic rebirth, have so far been able to provide very tangible cushions against more recent trends of stodgy growth, low wages and uncertain employment.

But Italians are also weary of problems they can do nothing about, like a widening corruption scandal involving contracts for the G-8 summits, not to mention the many investigations targeting Premier Silvio Berlusconi, mostly for his business dealings but more recently for allegations that he has used his influence on RAI state television's political coverage.

The real cost of the economic crisis may well be social, and not financial, as social stabilizers such as unemployment payments run out, which could reveal high unemployment.

Italian companies from its largest employer Fiat to small companies and artisanal enterprises have been taking advantage of Italy's unique form of temporary layoffs at a maximum 80 percent pay from a government-industry fund, allowing companies to halt production during slumping demand, while maintaining workers' ties to the company.

But some 18 months into the crisis, the schemes, which can only be used for 52 weeks in any two-year period -- are set to expire.

Workers like Katya Tomba, who has toiled for a decade for a small tannery that prepares leather for furniture outside of Verona, expects to be officially counted as unemployed at the end of June. The 41-year-old mother of two has been laid off since last June, receiving around euro850 a month of her usual euro1,200 salary.

"There's no going back," Tomba said. "I stopped by the office the other day and they told me that there are no orders, and not enough work for everyone, and that they will probably let more people go."

So far, the layoff schemes have kept Italy's unemployment rate to a relatively stable 8.2 percent, and prevented internal demand from collapsing.

But Claudio Giovine, an industry expert at Italy's National Confederation of Crafts and Small and Medium-Sized Enterprises, said data due out in the coming months will be key to revealing if there is more hidden unemployment than officially recognized. Not only will the temporary layoff schemes expire, but figures expected by fall will show whether or not millions of self-employed workers are giving up their business licenses.

"Some will lose their business, some will keep operating, but earling euro10,000 instead of euro30,000," Giovane said.

Italy's economy is uniquely driven by small and medium businesses, comprising 99.6 percent of all registered companies, and numbering some 4.48 million enterprises compared to about 3,600 large companies, or those with more than 250 workers. And many of these experienced a fall in orders of up to 50 percent last year, Giovine said.

This has created a potentially debilitating cycle, with payments to suppliers, which always ran a lengthy five months in Italy, now nearly completely stopped, Giovine said. Industrial collapse has been staved off by both the lack of debt load in the mostly privately held firms as well as the productions stops.

"The social stabilizers have been providing oxygen to the ailing. Now it is time to see if it is ready to take off again, or if the oxygen will run out," Giovine said. "Just because it is less perceptible, does not mean the social drama does not exist."

Indeed, Italy has been running a tight balancing act that relies heavily on private savings.

Italian workers earn the lowest salaries in Europe -- earning on average euro14,700 ($21,300) a year -- behind only Portugal in western Europe, according to the OSCE. An Italian worker earns 44 percent less than a British worker, 32 percent less than an Irish worker, 28 percent less than a German and 19 percent less than a Greek, 18 less than a French worker and 14 percent less than a Spanish worker, according to a 2010 report by the research institute Eurispes in Rome based on OSCE data.

Yet, home ownership is extremely high, which takes stress off in hard times, and often bankrolled by parents or grandparents. Italians are adverse to taking out loans, though this is changing, and put on average much higher downpayments on real estate purchases than in countries like Ireland or Spain, which experienced the housing bubble.

"There is a lot of leaning on the previous generation. How long can that last?" asked Marco Annunziata, the London-based chief economist for Unicredit, Italy's largest bank.

"It goes back to the issue of how fast is the economy growing. If the economy is growing very little, as it has over the last 10 years, it means the generation of new income is very slow. Unless the growth of GDP and income accelerate, then either we will see a constant erosion in the level of savings, or we will need to see some scaling back in the standard of living."

But it may ultimately be Italy's own take-it-as it comes attitude, and natural prudence, that has helped it stave off what other seemingly more dynamic econmies, such as Spain, Britain and the United States, have suffered.

"We are living through a crisis caused by too much risk-taking by investor banks. In a situation like this, a country that enjoys more life, and lives at a slower speed, might look sustainable," said economicst Franco Bruni at Milan's Bocconi University. "It is probably true that capitalism changes its music, and goes toward a more sweet waltz and stops rocking around."