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Crisis, what crisis? Italy is hardly noticing

ROME - Europe may be reeling from the worst recession in living memory, but in Italy you can barely tell.

As leaders around the continent suffer the backlash from factory closures and job losses, Prime Minister Silvio Berlusconi is more popular than ever, there is not a hint of social unrest and unemployment remains close to record lows.

It's not that the euro zone's third largest economy is flourishing, far from it. But Italy has been the area's most sluggish performer for well over a decade so Italians are inured to crisis and they can finally enjoy seeing others doing even worse.

"You'll see that we improve our position in this crisis, even if it's because others nations are going backwards faster," Economy Minister Giulio Tremonti told reporters last month.

He may well be right. The European Commission expects Italy's economy to contract by 2 percent this year, far less than Britain, Ireland and Germany and broadly in line with the average performance of the euro zone for the first time in years.

Long before a global credit crunch sent the world into recession Italian media pundits were wringing their hands about rising poverty and national decline. Now the same pundits focus on the European and American crisis more than the Italian one.

"Italy is used to a stagnant economy and a society feels the difference of going from zero growth to -2 percent far less than going from 3 percent growth to -3 or -4 percent as is happening in other places," said Unicredit analyst Marco Valli in Milan.

That may explain why dismal figures on industrial output and gross domestic product have produced negligible popular protests and no appreciable change in the national mood.

Retail sales data shows spending has been stagnant for years. It has recently got even worse but restaurants in the centre and the outskirts of Rome and Milan appear as full as ever.

"For us there has been a crisis since 2001 but not much has changed in the last year," said Alessandra Fiengo, who sells newspapers, books and toys from her kiosk in Rome.

"There is clearly a mismatch between what the experts tell us and public opinion," said Paolo Pizzoli of ING bank in Milan.

This is borne out by consumer confidence data from the ISAE think-tank and the European Commission which shows Italians' morale, although depressed, has fallen far less than the euro zone average.

Low Growth, Low Risk

Italy's traditionally low-growth but low-risk economic structure is a source of strength in the current crisis.

Italian banks' more conservative lending practices mean they have suffered less from the crisis than their European peers.

Credit card and household debt is a fraction of that in the United States, Britain and Ireland and is also well below that of mainland European economies like Germany and the Netherlands.

"Italian families have relatively high savings and low debt, that is important at a time of crisis because it gives citizens a bit of breathing room," said union leader Guglielmo Epifani.

Most Italians have no mortgage and live in houses fully paid for at the time of purchase. House prices never boomed as in Britain, Ireland or Spain and show no sign of a similar bust.

Italy's labour laws have become more flexible over the last decade, but for firms of more than 15 employees they still offer considerable worker protection.

As a result unemployment, which hit a record low of 6.0 percent in the second quarter of 2007, has edged up only gradually to 6.7 percent, still unthinkably low compared with rates of above 12 percent a decade ago.

Berlusconi Ahead

Berlusconi's response to the crisis has been to express constant optimism and generally act as if it didn't exist.

The government was widely criticised by economists for producing stimulus packages a fraction of the size of those of other large countries, and yet the prime minister's minimalist approach appears to be bearing fruit politically.

He remains far ahead in opinion polls and after a handsome government victory this week in a closely watched regional vote on the island of Sardinia, opposition leader Walter Veltroni resigned, leaving Berlusconi looking even stronger.

Analysts say it is only a matter of time before the output slump takes a bigger toll on jobs, yet the same economists point out Italian employment levels are traditionally stickier than elsewhere in Europe and correlate less closely to GDP changes.

For Italy, the most frightening aspect of the current crisis is what happens when it ends, said a top Treasury official who asked not to be named.

"The crisis will be less acute here and you won't see social unrest, but our structural weaknesses are all still there and when the other countries recover we will recover less. Then we will go back to being the sick man of Europe."