The contest for the title of sick man of Europe is a close-fought one. Is it Greece, where the 20% fall in output is of Great Depression proportions? Is it Spain, with its broken housing markets, wobbly banks and 50%-plus youth unemployment? Or could it be Italy, which has a smaller economy now than it did in 2001, saw the biggest fall in gross domestic product of any G7 country last year, and has a trend rate of growth barely above zero?
A good case could be made for giving Italy the nod. Ireland and Greece are at least getting the benefits of internal devaluation: the cuts in wages and public spending are reducing labour costs and making their economies more competitive. Spain's trade performance is improving. Italy is getting the worst of all worlds: austerity is compounding the impact of a poorly functioning economy, leading to exceptionally weak growth.
Mario Monti's reform programme was supposed to address some of these failings. In reality the much-touted structural reforms have been a feeble thing. The labour market remains sclerotic and the attempts to cut red tape largely cosmetic. Deficit reduction has been largely achieved through tax increases, which have sucked demand out of the economy. Monti's supporters in Brussels have tried to make out that he is Italy's version of Mrs Thatcher. He is not.
Parliamentary elections are being held in Italy this weekend, and the markets are starting to get nervous about the result. Somewhat improbably, Silvio Berlusconi is on the comeback trail and an inconclusive election result would be seen as negative both for Italy and the eurozone as a whole. A bigger danger is that the election highlights the fact that the creation of the euro has not brought about the expected economic convergence in member states; but rather the opposite.
Italy's woeful performance encapsulates this trend. It is half-hearted about structural reform and cannot devalue its way back to competitiveness. Austerity increases already strong recessionary pressures. Financial tensions in the eurozone have eased since last summer; the economic tensions are as acute as ever.
