ITALY IN A NUTSHELL:

Tommaso's gamble: A bold plan to curb welfare spending could end up raising it instead (The Economist, 3/08/07)

In January the OECD said that if pension and health spending were not trimmed, Italy's public debt, the world's third-biggest, could more than triple by 2050. A rapidly ageing population makes pensions a particular worry. Already, they take up 14% of GDP; finance-ministry projections show this figure rising to over 17% by 2035 if future entitlements are not adjusted to match rising life expectancy.

A 1995 reform envisaged just such an adjustment after ten years. But, sensing a vote-loser, Silvio Berlusconi's centre-right government dodged putting it into effect before last year's election. The Prodi government could impose a change, but that would outrage trade unions. [...]

The government's unusual tactic is to make a string of offers ahead of the talks with unions: unemployment pay for young workers between short-term contracts, notional contributions to boost future pensions, a rise in unemployment benefits, a boost for the smallest pensions and a slower raising of the minimum retirement age. Few of these changes would benefit union members, who are mostly old and in permanent jobs. But the government hopes that union leaders will find it embarrassing to reject its generosity and will thus accept its other reforms.

Therein also lies the risk. The government can afford to be generous right now, as tax revenues surged last year. But much of this increase reflected cyclical or one-off measures. If the unions take too much and do not give up enough, a plan that set out to cut long-term spending could turn into one that raises it instead.