Italy, rich in art, cuisine and ancient history, went from being the “sick man of Europe’' to its third largest economy, only to see its future imperiled by stagnant growth, political paralysis and investor fears over the mountain of debt it has piled up over the years.In a sense its economic troubles date back to the late 1990s, when the country’s manufacturing was overtaken by competitors in Asia. Its patronage-based politics and rule-bound labor practices changed little, but a flood of cheap money that followed the introduction of the euro helped keep the system going.Then came the global financial crisis of 2008, which shrank Italy’s economy by more than 6 percent. Growth resumed in 2010, but was snuffed out in 2011 by the rising debt crisis, and the International Monetary Fund predicts “another decade of stagnation.”
At roughly 120 percent of G.D.P., its growth-hobbling government debt is second only to Greece’s among euro zone members. Although it has run a budget surplus, minus debt costs, for several years, the Italian government spends about 16 percent of that budget on interest payments — a bill that began to rise in the summer of 2011 as investors and creditors began to fear that Italy cannot escape Europe’s debt crisis.Italy is often now described as Europe’s “too big to fail’' economy. The amount of its debt held by foreigners — nearly 800 billon euros — is more than that of Greece, Ireland and Portugal combined. The debt problem is compounded by the country’s economic slowdown — in December 2011, the government’s minister for economic development proclaimed that Italy had already entered a recession.
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