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Ever since I moved to Rome almost a dozen years ago, the health of the Italian economy was treated as an afterthought. Apparently, it still is.

Silvio Berlusconi partied his way through the financial crisis as the remnants of la dolce vita faded away, never to return. Lurid stories of his “bunga bunga” sex parties, and the endless court cases against him, distracted Italians from the ugly truth that Italy, a Group of Seven country and Europe’s second biggest manufacturer, could no longer generate enough wealth to finance its pleasant lifestyle. Or pay its bills without issuing torrents of expensive debt.

When Mr. Berlusconi was effectively ousted as prime minister in 2011, an emergency technical government made only halting progress toward economic reforms, although it did spare Italy from default. The next government came up short too, in spite of promises to move fast and break things in its campaign to drag Italy kicking and screaming into the modern competitive age.

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Today, Italy has a Euroskeptic populist government – the first in Western Europe – that is big on sovereignty and erecting barriers to migration and not so big on the economy. Italy is back in recession for the third time in a decade and has emerged as the biggest threat to the health of the European Union and the euro zone. Forget Brexit – the EU can survive Britain’s exodus from the EU. But there is no way the EU could survive Italy’s financial collapse.

Italy has proven that populists can get elected, but not, so far, that they can manage one of the world’s biggest economies. Less than a year after Matteo Salvini’s League party and Luigi Di Maio’s Five Star Movement (M5S) formed a coalition government, the economic pain has returned and all of the EU is feeling it.

Italy’s populists raised hopes among Italians that they would end the era of austerity and push the economy into solid growth, creating millions of jobs along the way. It hasn’t happened, leading to speculation that the Italians’ love affair with the odd couple who run the government, who had vanquished the established centre-right and centre-left parties that had dominated Italian politics since the late 1940s, may not be their saviour.

At least one recent poll suggests that the meteoric rise of Mr. Salvini, the most powerful politician in Italy – he’s Deputy Prime Minister, Interior Minister and Italy’s social-media champion – and the new face of European populism, has stopped.

The Italian government cannot be happy that the European media is full of stories about the economic revival of Greece while Italy’s own touted revival has vanished. Greece was the poster child of the European financial crisis and the deep economic recessions that followed. The Greek economy collapsed, youth unemployment reached 50 per cent and lineups formed at food banks. In 2011, and again in 2015, Greece came close to getting the bum’s rush out of the euro zone – remember Grexit? It took three bailouts to keep Greece in the common currency.

While Greece is still weighed down with a crushing debt load, equivalent to 180 per cent of gross domestic product, its economy is finally coming back to life. The International Monetary Fund expects it to expand by 2.4 per cent this year, making it one of the top performers in Europe. The stock market is up almost 20 per cent since January and the government is selling bonds again. Yields on Greek bonds have dropped to their lowest level in 14 years. On Friday, the yield on benchmark 10-year Greek bonds was 3.32 per cent. In 2011, it reached 40 per cent.

And Italy? Most of the key economic numbers are going in the wrong direction. The government has reduced its 2019 growth forecast to 0.2 per cent and that figure might be optimistic. The forecast budget deficit has climbed from 2 per cent of GDP to 2.4 per cent, and overall debt has cruised past 130 per cent of GDP (Germany’s is less than 60 per cent). In what is perhaps ultimate humiliation, Italy is paying pretty close to Greek levels to sell its debt. Italian 10-year-bonds on Friday carried a yield of 2.61 per cent, by far the highest among the large European economies.

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The populist government in Rome has pursued an expansionary fiscal plan to jolt the economy back to life and create jobs – Italian youth unemployment is higher than in Tunisia. It has pledged to boost spending, create a flat tax for those earning less than €50,000 and a guaranteed annual income for the poor.

Those ideas helped to propel the populists to power, but there’s a snag. Italy’s dire financial shape means there is almost no room for tax cuts and extra spending, all the more so since the European Commission extracted a promise from Italy during the financial crisis to bring down its budget deficit and crushing debt load. Keeping the promises to both Brussels and to voters seems impossible.

In one sense, the Italian populists are not much different than previous governments: They share an allergic reaction to deep economic reform.

Italy is uncompetitive, which has sent manufacturers fleeing. Even Fiat has moved its head office outside of the country (to Amsterdam and London) and has pretty much given up on mass production inside the country. Fiats are built largely in Poland, Serbia and Turkey. Italy needs pension reform. Its dozens of monopolistic guilds, from taxis to pharmacies, need to be broken up. Italian employment law makes it difficult to fire workers, which works as a disincentive to hiring. The universities are falling in the international rankings.

Mr. Salvini and his populists showed astonishing talent by getting elected on a tiny budget. Even Steve Bannon, Donald Trump’s former campaign chief and strategist, is awestruck by their success. But unless the economy is made more competitive, their fortunes could go into reverse in a hurry. You know Italy is in trouble when it is being upstaged by Greece.

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