THE danger for Europe’s single currency seems to have abated. Bond yields in peripheral countries have fallen; worries that some members might be forced out have dissipated; budget deficits have shrunk; the first signs of recovery are showing in Ireland and even Spain. Yet the euro zone’s crisis is far from over. Rather, its acute phase has become chronic. The concern has moved from just bust budgets and broken banks, to a lack of jobs and slow growth.

Lost competitiveness, high unemployment and stagnation were always the biggest long-term risks for Europe’s single currency. These problems may be most obvious in the usual peripheral suspects—Greece, Spain and Portugal, but are not confined there. The euro zone remains in recession. The economies of Germany and France shrank in the fourth quarter of 2012. France is struggling to reform (see article). But the worst of them all is Italy (see briefing).

Italy’s failures are not as obvious as those of other countries. Despite its huge public debt—almost 130% of GDP—its public finances and its banks are in better shape than those in Greece or Portugal. It also avoided the property booms and busts that ravaged Spain and Ireland. Yet Italy’s economy is one of only two in the euro zone in which real GDP per head has fallen since the euro came into being. In the global league table of growth in GDP per head, it comes 169th out of 179 countries over the period since 2000, beating only a handful of basket-cases such as Haiti, Eritrea and Zimbabwe.

Now Italy also risks being left behind by its neighbours. Unit labour costs in most of the euro zone’s Mediterranean countries rose far above Germany’s after the creation of the euro, but in most they have fallen sharply since the crisis began. In Italian factories, by contrast, they have risen since 2008 by more than in any other euro-zone country except Finland.

Italy’s economic problems mean that its election on February 24th and 25th matters far beyond the Alps. If the euro zone’s third-biggest economy and its largest public debtor cannot reignite growth and generate new jobs, Italians will eventually lose hope or their northern neighbours will lose patience. Either way, the euro zone will fall apart.

When win-win is possible

Fortunately there is a way forward for Italy: deep and comprehensive reforms to its over-regulated economy. The outgoing technocratic government led by Mario Monti, in office since the curtain came down on Silvio Berlusconi in November 2011, started down this path with pension, regulatory and labour-market changes. By some estimates, these measures have already raised Italy’s potential growth by almost half a percentage point. But much more is needed.

Italy has far too many protected economic interests, from notaries to pharmacists, and from taxis to energy suppliers. It also has too many layers of government: provincial, regional and local administrations that often duplicate rather than replace the activities of central government. A constipated judicial system makes contractual disputes impossibly long, costly and unpredictable: the average civil trial in Italy lasts for 1,200 days, compared with 331 in France. Employment is too heavily taxed, and public spending is skewed towards transfers rather than investment.

Yet all this also provides an opportunity. A recent study by the IMF, which also looked at the evidence from other countries, concluded that product- and labour-market reforms in Italy could raise GDP per head by 5.7% in five years’ time and by 10.5% in ten. If they are done simultaneously (and it may be easier to tackle vested interests all at once rather than one at a time) and are complemented by sensible fiscal reforms, the potential jump in GDP after ten years rises to over 20%. That should set a clear target for the next government.

The best and the rest

Italians have a choice between the good, the bad and the broadly acceptable. The best result would be for Mr Monti to stay on as prime minister. He is running on a pro-reform ticket backed by a coalition of centrist parties. Sadly, the professor is better at governing than campaigning: his poll ratings have seldom crept above 15%, putting him in fourth place.

The worst outcome would be a victory for Mr Berlusconi’s right-wing coalition. For a host of personal and political reasons, this newspaper continues to regard the media tycoon as unfit for office. He failed to reform the country in over eight years in power and his party, unlike its centre-right peers in other troubled European countries, is still campaigning on a programme that ignores reform too.

Explore our interactive guide to Europe's troubled economies

Given Mr Berlusconi’s naked advancement of his own interests at the expense of his country’s, it is amazing that any Italians still support him. Yet, in the polls he has narrowed the gap with the centre-left coalition under Pier Luigi Bersani, giving him a chance of winning a majority in the Chamber of Deputies, though taking the Senate (and thus being able to form a government) looks beyond him. But Mr Berlusconi could paralyse the political system, probably forcing another election, alarming the markets and reviving the euro crisis: a miserable mess even by his own standards.

That leaves Mr Bersani, whose centre-left coalition has led in the polls since the election was called. His backers include former communists, and he has a coalition partner from the far left. Yet Mr Bersani also has a reasonable record as a reformer in past governments. If he won the election, but failed to secure a majority in the Senate, he would have to form an alliance with Mr Monti; and Mr Monti could use his bargaining power to demand a role as a super-minister overseeing the economy.

A government led by Mr Bersani, with Mr Monti in charge of the economy, would be a decent outcome for Italy. It would have the confidence of the markets and the international institutions whose approval is needed to keep countries afloat. More important, it might get serious about reforming an economy which, if it goes on the way it did under Mr Berlusconi, will eventually collapse and drag the euro down with it.