Italy Pushes to Narrow Growth Gap With Peers

ROME—Italy is seeking to halve the gap between the pace of its economic expansion and the average growth rate of the euro zone within three years, with the help of several recently approved deregulation and tax-relief measures, a top government official said.

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Italian Prime Minister Silvio Berlusconi, left, and Minister for Public Administration Renato Brunetta in Rome.

Italy's gross domestic product grew 1.3% last year, compared with 1.8% for the euro zone as a whole, according to European statistics agency Eurostat—a gap that puts Italy some 30% behind the average. "If the new growth measures are implemented entirely, that gap will be halved," Italy's Minister for Public Administration Renato Brunetta said in an interview.

The minister said he was referring to several growth-boosting measures in a €40 billion ($57 billion) budget package approved by Parliament last week and to other measures passed in May, aimed at helping Italy's under-developedsouth, cutting red tape for real-estate developers, and streamlining accounting for businesses.

Financial markets have recently homed in on Italy's anemic growth amid worries over the country's large debt, which is 120% of GDP. To try to quell market panic, the Parliament on Friday quickly approved measures aimed at balancing the country's budget by 2014 and encouraging long-term growth.

Italy faces an uphill battle as it tries to raise its growth rate, however. Like Germany, Italy's growth is driven mainly by exports, which made up about a quarter of its GDP in 2010.

Many of the goods Italy produces for export, however, are in low-tech sectors such as textiles, chemicals and machinery, where Italy faces fierce competition from emerging economies like China. As a result, Italy's output has lagged far behind Germany's. In May, Italy's industrial output rose 1.8% compared to the same period last year. Germany, meanwhile, clocked a rise of 7.5% in industrial production for the same period year-on-year.

Italy is also saddled with an aging work force and a new generation of workers struggling to gain a foothold. In the first quarter of 2011, nearly one in three Italians between the ages of 15 and 24 was without a job.

Italy's efforts to rein in public spending could also hinder consumption and growth. Public-sector wages accounted for more than 10% of Italy's GDP in 2004 to 2008, according to the European Central Bank.

As public administration minister, Mr. Brunetta, a labor economist, is in charge of squeezing more productivity out of a public-sector work force that accounts for about 20% of Italy's payroll employment. So far, the minister has raised hackles among public-sector workers by introducing measures aimed at boosting accountability, posting their salaries on the Internet and cracking down on absenteeism.

The minister has been branded a scourge by Italy's public workers—a label he largely embraces. "We have a series of structural gaps that are causing our slow growth," Mr. Brunetta said, citing public-sector inefficiency, tax evasion and a lack of infrastructure as key sources of economic weakness.

Mr. Brunetta, who has served in the conservative government of Prime Minister Silvio Berlusconi since its inception in 2008, said Friday's passage of budget measures is a "watershed moment" that should prompt the government to shift gears from belt-tightening to the deeper, underlying problem of low growth.

"The government needs a re-launch," he said. "We now need growth reforms in the justice system, in financial and labor markets, in energy policy."

Many economists say one of the biggest obstacles to growth in Italy is the national system of labor contracts and a collective bargaining system that forces many of Italy's biggest companies to hire people under cushy open-ended contracts that aren't tied to productivity. A decade ago, Rome introduced temporary employment contracts, but the majority of the work force is still on open-ended contracts.

Mr. Brunetta conceded the result has been a system of insiders, or older workers who never have to worry about job security, and "an excess of [job] insecurity that is dumped on the outsiders, mainly the young." But he said it would be difficult—politically and socially—to overhaul the system anytime soon.

—Alessandra Galloni contributed to this article.

Write to Stacy Meichtry at stacy.meichtry@wsj.com

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