In recent months, Prime Minister Silvio Berlusconi's government has been limping from one confidence vote to the next. Now, Berlusconi is under intense pressure to implement a thorough reform package. A cabinet meeting on Monday did not yield any results.

Business executives say that an unwieldy bureaucracy and too little innovation mean Italy is no longer competitive.

While unemployment among the country's youth is high, those who make it to retirement can look forward to a generous pension plan. This includes the sibling pension. When a pensioner dies, his or her brother or sister can claim 15 percent of the pension of the deceased.

This is just one example of why many believe that Italy's most pressing problem is the need to reform the pension system.

"Over the next two or three years the pensions will be the most serious problem," said Pietro Reichlin, a professor of economics at Rome's Luiss University.

"There are too many people to who retire far too early with a pension that is far too high compared to what they paid into the system. Our national pension plan has a deficit that can never be made up," he added.

Berlusconi is under pressure to come up with a plan

While Italy's pension scheme makes it a good place to grow old, it is a much different story for those who are just starting out in their careers. The unemployment rate among Italians under the age of 25 is 28 percent.

Not only is this a major social problem, but according to Gian Maria Gros-Petro, it also means Italy is failing to take advantage of its potential for innovation.

"Italy is a small country, with less than 1 percent of the world's population. We can only grow if we become the sort of country that introduces world-class innovations," he said.

Unwieldy bureaucracy

Until recently, Gros-Petro was the head of Italy's biggest motorway operator, which gave him first-hand experience in the challenges that businesses face. What he sees as the worst problem in Italy is the bureaucracy - it can take an eternity to get a building permit. It takes even longer if you have to go to court.

"It is unbelievable how long it takes to get justice done in Italy. And this is associated with costs, which companies see as an impediment to doing business in Italy," said Gros-Petro.

There is a way to get things done more quickly, but this requires cold hard cash. Corruption and cronyism are putting the brakes on Italy's economy, according to Tatjana Eifrig, an analyst with Rome bank Finnat.

"Italy is more like a planned economy than a capitalist country. Jobs are handed out as favors," she said.

"You wind up with five people doing the job of one, because there is always a cousin of somebody who did me a favor. And it's the taxpayer who picks up the tab."

Pensioners in Italy benefit from relatively high incomes

Weak infrastructure

Another disadvantage is the country's infrastructure; south of Naples, it's difficult to get anywhere by road or rail.

"One striking example is the Gioia Tauro harbor, which was supposed to become the Rotterdam of the Mediterranean. There still isn't a proper road on which to transport the goods, let alone a freight terminal," said Eifrig.

All of these problems didn't just appear overnight, and more than anything else it's the politicians who have been to blame for Italy's descent from an economic power to an economy on shaky ground.

Berlusconi has been talking about extending the motorway from Salerno to Calabria for the past 17 years, but little has actually been done. This is in part due to his coalition partner the Northern League, which puts its clientele in the north of the country first.

According to economics professor Pietro Reichlin, this is just one example that shows how Italy's government has become the greatest drag on the economy.

"The Italian government appears to be incapable of meeting the current challenges, because it's made up of a coalition that is very much divided."

Author: Tilmann Kleinjung, Rome / pfd

Editor: Nicole Goebel