Italy stuck in downward austerity spiral

Beleaguered Italy paid the price of Prime Minister Mario Monti's €20bn (£15.8bn) austerity drive yesterday as official figures showed its sclerotic economy shrank at the fastest annual pace for three years between April and June.

The figures showed a fresh 0.7 per cent slide for the eurozone's third-biggest economy, extending its double-dip recession into a fourth successive quarter.

Italy's economy – sluggish even in the years leading up to the financial crisis – is now 2.5 per cent smaller than a year ago and grappling with surging unemployment.

Its huge debt burden – more than 120 per cent of GDP – has also worried investors who fear the country could be the biggest victim of a debt crisis threatening to engulf Spain.

Italy's flagging economy and austerity measures are creating a vicious circle as tax revenues and consumer spending suffer, threatening Mr Monti's timetable for cutting the deficit.

The nation's benchmark cost of borrowing is still stubbornly close to 6 per cent.

Mr Monti has repeatedly warned European partners that unless they show flexibility towards Italy on public finances, the country could soon be run by a eurosceptic government with little commitment to cutbacks.