In theory, Italy, with its huge public debt, should be one of the euro zone's problem children. In reality, the country has come through the current crisis relatively unscathed. Can the rest of Europe learn something from its southern neighbor?

Maria Cannata can't think of a job that would be more exhausting than hers. She has been la signora del debito, Italy's "debt lady," for almost 10 years. During that time, she has done an outstanding job.

Cannata leans back, relaxed, in a black leather chair. On the walls of her office in the Finance Ministry in Rome hang family photos and promissory notes from the year 1850. Cannata manages the liabilities of the second largest debtor among the world's industrialized countries and ensures that Italy remains solvent.

An unpretentious woman, Cannata, 56, sports a practical hairstyle and no makeup. She says that she sleeps well at night - she's known worse times.

Italy's public debt is over €1.76 trillion ($2.27 trillion), or 115.8 percent of its gross domestic product, making it Europe's leading debtor. By comparison, the average public debt of the euro-zone countries comes to 78.7 percent of GDP.

Along with Portugal, Ireland, Greece and Spain, Italy is one of the unfortunately named PIIGS countries - the axis of mismanagement, if you will. It's an appalling performance for a state that belongs to the exclusive G-8 club of the world's seven leading industrialized nations and Russia. Rating agencies put Italy on par with such shaky countries as Ireland, Malta and Portugal. Does Italy pose a threat for all of Europe?

Trusting in Italy

Cannata is familiar with the rumors. The bottom line is numbers, though, not words - and how much interest Italy will ultimately have to pay on its debts. Every percentage point reflects a degree of trust, and every 10th of a percent less is a personal triumph for her.

When Cannata had to restructure billions in debts again last April - €9.5 billion to be exact - for a long time it looked as if there weren't enough buyers for the new government bonds. Some experts advised her to float fewer bonds on the market, to avoid driving down prices. But Cannata stuck to her course and, in the end, got what she wanted. She often negotiates better conditions than Spain, which doesn't have nearly as much government debt.

Is this an extraordinary ability? Gambling against the trend? Or just a cheap trick? Why, in the midst of the financial crisis, should anyone believe in this country, whose government debt can be partly attributed to Roman nepotism and corruption?

Ongoing Crisis

Prime Minister Silvio Berlusconi, 73, is politically weaker than at any other time since his re-election two years ago. For weeks now, his government coalition has appeared paralyzed, bitterly wrangling over a wiretapping law that Berlusconi wants to push through before the summer break, and mired in one bribery and justice scandal after the other. Two ministers have had to retire since May, and now, of all people, Economy Ministry undersecretary Nicola Cosentino has also had to step down amid allegations of mafia contacts and founding a secret society.

When Berlusconi received the "Grande Milano" award last week in Milan for his life's work, he was praised as a "statesman with rare abilities who leads his country with a clear conscience into the future." In reality, however, Berlusconi's political days are numbered. The struggle over his succession is already underway.

Cannata doesn't talk about politics - she's not allowed to. She says that Italy has been plagued by an ongoing crisis for the past 20 years - that's how long the country has been teetering on the edge of bankruptcy. In 1994, its debt peaked at 121.8 percent of GDP. There was already a lot of talk of action back then - even though there was no global financial crisis at the time - but that didn't have much of an impact on the amount of debt amassed by the country. Italy continued along the same path.

Ironically, the country's state of permanent crisis has perhaps had the effect of staving off the worst during the current crisis. It doesn't have to weather a burst real estate bubble or a construction crisis. Italy didn't have to bail out any banks, either. The government already had its hands full with its own debts.

Avoiding Others' Mistakes

While in Spain and Ireland a debt-financed construction boom and dubious deals by investment bankers were generating high growth rates, Italy was busy tinkering with its high government debt. "A more highly regulated banking system offered fewer opportunities to copy the mistakes made by other E.U. countries," says Alexander Kockerbeck, an analyst at the U.S. rating agency Moody's. Italy hasn't engaged in the excesses of the past few years.

Italy is suddenly seen as the country that has shown its mettle in the crisis by taking the toughest stance, as an expert in debt management.

No country in Europe has been forced to tighten its belt as brutally as Italy. Cannata's boss, Finance Minister Giulio Tremonti, has just enacted draconian cost-cutting measures for his country. He did so against the will of Berlusconi, who has been scoffing at the crisis for months - even promising tax cuts and maintaining that Italy is the richest country in the E.U.

The austerity measures aim to save nearly €25 billion by the year 2012, with the main burden being shouldered by municipalities and regions. Its budget deficit amounts to 5.3 percent of GDP, roughly twice as much as in the past, yet remains significantly lower than the European average. The Italians plan for it to drop low enough to meet the Maastricht criteria, which stipulate that a euro-zone member's budget deficit can not exceed 3 percent of GDP, by the year 2012.

Experience with a Debt Mountain

And there is nothing to indicate that things will improve in the future. According to the latest study by the Italian research institute Demos & Pi entitled "We, the Others and the Crisis," 56 percent of Italians no longer believe in Berlusconi's state-decreed optimism. Nearly half of those surveyed fear a Greek tragedy and assess their own economic situation in the year 2010 as "bad" to "very bad."

"Necessity is the mother of invention," says Cannata, the debt manager. She now travels a great deal around the world representing Italy, on a mission to build trust. She has to make it clear that government debt alone says nothing about a country - and that it doesn't present a threat, but rather an opportunity. According to Cannata, it's the years of experience with a mountain of debt that win over her investors.

Solid Footing

Cannata believes that it's no coincidence that Italy was the first country to create a sophisticated electronic trading system for government bonds - the bond trading platform MTS.

Italy has secured long-term financing, giving it a relatively solid footing. The average maturity period for government bonds is an impressive seven years. Furthermore, most of these securities have fixed - not variable - interest rates. "This will allow the Italians to benefit from today's historically low interest rates for a long time to come," says Kockerbeck.

Even today, the balance sheets of Italian banks primarily contain business loans for Italy's many small and medium-sized companies, which form the backbone of the country's economy. There are no huge bundles of toxic real estate loans, which can also be explained by the fact that Italian law makes it difficult for banks to seize property when homeowners default on their mortgages. This means that banks often require down-payments that only few people can afford. "The real estate bubble occurred more in the underground economy and was financed with personal capital," says Kockerbeck of Moody's.

Taking Matters into Their Own Hands

So should we admire Italy instead of ridiculing it? "Europe is converging towards Italy," says Kockerbeck. The country, he explains, has decades of experience in dealing with high debts and low growth rates. These are lessons that the remaining E.U. countries still have to learn if they are to avoid repeating the mistakes of the past 10 years.

There is no generous welfare state in Italy, and no extra funding during the crisis. Where the state has failed, people have taken matters into their own hands - and saved their euro cents. Household debt in Italy is only 56.6 percent of annual disposable income, whereas in Germany it is 89.4 percent, in Spain 127.8 percent and in the U.K. a whopping 152.6 percent. Perhaps the lesson to be learned from the Italian miracle is that everyone should look after themselves.

"Italians have never expected much from their government - they don't trust it," says Beppe Severgnini, a columnist for the daily newspaper Corriere della Sera. "They rely on themselves."

Severgnini writes best-selling books about the Italians' unique mentality. "Italians are tightrope walkers," he says, explaining that they have mastered the art of walking a fine line, without becoming dizzy or looking down at the abyss. There's no doubt that the facts are dramatic. The challenges facing Italy include the latest political scandals, a government that is falling apart at the seams, extremely high youth unemployment, the joint lowest birth rate in Europe (together with Spain) and catastrophic cutbacks in the educational and health systems. All of those things are well known - but they are only one side of the story.

Bailing the Family Out

The other side, says Severgnini, is support within the family. Italians are animali sociali, he says - family people. Everyone looks after themselves and their clan. The family is Italy's real bailout package. It replaces the missing welfare system, weathers any crisis and comes free of charge for the state. In fact, it even makes life easier for it. Over 80 percent of Italians own their own house or apartment, and the mortgages on most of those properties are already paid off - another reason why there was no real estate crash in Italy during the financial crisis.

During a crisis, families close ranks, place their older members less often in retirement homes, live with three generations under one roof, share the grandparents' retirement funds, line up jobs in their family-owned businesses, lend each other vacation homes and dig into their savings. "The family rescues the state," says Severgnini, "which is another reason why Italy is doing relatively well during the financial crisis."

The Italians have coined a name for this phenomenon: bamboccioni - literally, "big babies." The term is used to describe long-since grown-up children who still live with their parents - and it applies to 70 percent of all 20- to 30-year-olds.

'I'm Too Old for a Fresh Start'

They are mainly well-educated men like Giorgio und Franco Mazzeo, who are 44 and 36. Every night, the brothers fold out the sofa bed in their parents' living room, a two-room apartment on the seventh floor of a high-rise building in Trastevere, one of Rome's better neighborhoods.

They both have college degrees, and both have jobs, but no permanent positions. Giorgio is an engineer and his brother works in a call center. Together they earn less than their father receives for his pension: nearly €2,000 ($2,600). Their mother Mazzeo cooks, cleans and irons. Her sons help out, but they don't pay a cent. They can't pay their own way, not in Rome, the city with the highest rents in Italy. Each of them would have to pay over €1,000 a month to rent a room, with too little left over for other expenses.

They like to complain at length about the crisis and about having to live at home, something that they say robs them of their independence and leaves them feeling discouraged. But when they have an opportunity to move out - like Giorgio, who has purchased an apartment with his savings and now only has to furnish the kitchen - they tend to hesitate. "I'm too old for a fresh start," he says.

At night, as he lies on his mother's couch, he often wonders about the future - about who will feed his children, should he decide to bring any into this crisis-ridden world, and about what a normal life might be like.

He has grown accustomed to the crisis. Should it be overcome some day, he will probably miss it.

Intellpuke: You can read this article by Spiegel journalists Beat Balzli, Fiona Ehlers and Marc Hujer in context here: www.spiegel.de/international/europe/0,1518,708701,00.html
This article was translated from the German for Spiegel by Paul Cohen.