Italy next?

Just a few years ago, Italy's own mammoth debt, stagnating economy and inability to cut the fat in its bloated public sector looked like they might tilt the country into depression and take the whole of Europe with it.

While the chorus of voices announcing doom - and investors betting against a turnaround - have largely dimmed, today, the eurozone's third-biggest economy is still hunkered down, unsure of its future.

Recently, I bumped into a former neighbor in Rome who, with her sisters, runs an historic pasticceria or patisserie in the north of the city. She told me she was off to Greece for a short vacation, then back in Rome to work for the rest of the summer. A few years ago, she explained, the family ended the decades-long, sacrosanct Roman tradition of closing shop for the month of August.

"People just don't go away in the summer anymore," Cinzia said, "and with the economic crisis we can't afford to lose customers by closing even for a week."

Gone are the days when the pasticceria thrived thanks to a set of loyal customers spending freely on pastries and cakes for every special occasion. "With the recession, we've had to work hard to expand our customer base because everyone is very, very careful about how much they spend, selecting a few special items and making the rest at home."

The new normal?

Like many Italians, Cinzia has adapted to the times and in her case, has weathered the downturn without laying off workers. Also like many Italians, she sees the changes not as a temporary set back, but as the new normal.

This is despite the faint signs Italy recently has shown of economic improvement. Industrial production rose in the last quarter by 3 percent, mainly due to the county's still important automobile and machinery sector.

Prime Minister Matteo Renzi hailed the rise as proof that the tax deductions for investments, an 80-euro monthly tax bonus for low-income earners and a cut to payroll taxes his government introduced as part of his Jobs Act are working

He also announced that unemployment has dropped and longer-term job contracts are on the rise.

But many observers say this is political spin: high numbers of people have permanently exited the job market and are no longer counted among the unemployed. And those longer-term contracts don't represent new jobs being created, but rather people switching the type of contract they're employed with.

Even that small lift in the industrial production can largely be explained by external factors such as the drop in the price of oil, a weaker euro that's helped exports and more readably available loans and lower interest rates due to the influx of cash to the banks from the European Central Bank intervention - factors that could all change overnight.

A new pact

Still, the young, energetic Renzi is pulling out all the stops to project a feeling of confidence that the Italian economy is on the upswing. This week he announced "a pact with Italians" with tax cuts totaling more than 50 billion euros over the next five years, including the elimination of a widely resented property tax on first homes.

Nonetheless, Italy's public debt continues to loom large at 130 percent of national output - second in Europe only to Greece. And despite Renzi's support of Greece's call for less austerity and more growth-focused help, when push came to shove, he urged Greece to accept Europe's offer. He was well aware that Italy is set to lose over 40 billions euros in direct loans to the country if Greece defaults and leaves the euro.

While many Italians remain frustrated that the country's public sector is inefficient, taxes are a burden and corruption persists, they don't believe Italy could be the next Greece.

Knock-on effect

"The only risk to Italy is if the big financial institutes decide to attack the country," says former center-left coalition cabinet member and commentator Alfonso Pecoraro Scanio. "This happened some years ago when they believed we were not strong enough. Now that we have made some changes, the feeling in Italy is stable because we said 'yes' to the changes the financial institutions wanted us to make."

He, like many Italians, is most worried about the Greek crisis in terms of what it means for Europe. "The project of Europe was one of solidarity, to grow together and to avoid war. Now we are watching a kind of economic war between Germany and Greece," he said. "But of course, we need to say to the Greeks, you have to make reforms."

My Roman pastry chef friend Cinzia agrees. As she heads off to her yearly vacation in the Greek islands, she says she can't recall ever getting a receipt at a restaurant or hotel there. "Italy has its problems," she says, "but Greece has a long way to go to catch up with the rest of Europe, or even with Italy."