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It's choked with debt, should have been fixed a long time ago, and both leading candidates for Italian prime minister decry its condition.

As April 13-14 elections near, you can't tell whether Silvio Berlusconi and Walter Veltroni are talking about Italy's economy or its national airline, Alitalia SpA.

Italy has become Europe's second-least competitive economy since adopting the euro in 1999. It has the largest debt in Europe — bigger than its annual gross domestic product — and economic growth this year is likely to be the slowest among the 15 nations that share the single currency, according to the European Commission. Meanwhile, both candidates are pledging tax cuts and higher public-works spending, a strategy that may increase the budget deficit.

“Italy and its economy are like the Titanic hitting the iceberg,'' said Gianni De Michelis, deputy prime minister in 1988 and 1989. “It's gotten to this stage after years of negligent governments on both sides. Berlusconi or Veltroni? It makes no difference.''

The national election, called when Prime Minister Romano Prodi's government collapsed Jan. 24 after 20 months in power, comes as the outlook is worsening. The government last month slashed its 2008 growth forecast by more than half to 0.5 percent and predicted that the deficit, now 1.9 percent of gross domestic product, would widen.

Promises

While two-time prime minister Berlusconi, 71, and Veltroni, the 52-year-old former mayor of Rome, both promise to reduce spending so they can cut taxes, neither has made clear what they would trim. The prospect of rising debt fuels the risk to Italy's credit rating, ratings companies say.

Standard & Poor's and Fitch Ratings slashed Italy's creditworthiness in October 2006, less than six months after the last election. S&P also cut the rating in July 2004, during Berlusconi's tenure. Fitch rates Italy's long-term debt AA-, while S&P gives it A+.

“We hope they would reduce expenditure in public administration and, more importantly in the long term, cut pension spending before contemplating tax cuts,'' S&P's credit analyst Trevor Cullinan said in a telephone interview from London. “That doesn't look likely.''

Investors are indicating skepticism as well. The difference in yield between Italy's benchmark 10-year bond and the German bund, Europe's benchmark security, rose to 65 basis points last month. It was the highest spread in more than a decade. A basis point is equivalent to 0.01 percentage point.

Interest

Interest on the national debt is 70 billion euros ($109 billion) a year, about 1,200 euros per Italian http://payday-z.com. Italy is also burdened with a pension system that eats up 15 percent of GDP, the highest in the European Union, according to the Organization for Economic Cooperation and Development.

Prodi's government raised taxes and cut spending to reduce the debt and bring the deficit below the EU limit for the first time since 2002. He had less success finding a domestic solution for state-owned Alitalia, which hasn't earned an operating profit in almost a decade and has had nine government-appointed chief executives in the past 15 years. The carrier owes creditors about twice its current market value and has received two state bailouts in the past six years.

Prodi, 68, chose Air France-KLM Group SA to buy the state's 49.9 percent stake. The March 16 offer valued Alitalia at 10 cents a share, 80 percent less than its market value then. Air France yesterday broke off negotiations, ending the government's 15-month attempt to find a buyer.

`Arrogant and Unacceptable'

Berlusconi denounced the bid in campaign appearances as “arrogant and unacceptable'' and called on Italian entrepreneurs to come forward with an alternative offer “in the name of national pride.'' Veltroni asked that Alitalia stay outside “the electoral meat grinder.''

That's unlikely. Air France dropped its bid after failing to gain union support for the offer, prompting Alitalia Chairman Maurizio Prato to resign. Finance Minister Tommaso Padoa- Schioppa said yesterday that the only alternative to the Air France purchase would be to seek protection from creditors.

While the airline was amassing more than 3 billion euros in losses in the past decade, Italy's overall competitiveness was slipping to 46th in the World Economic Forum's 2007-2008 ranking. It trails behind Latvia, South Africa and Bahrain and, in the euro area, ranks only above Greece.

Prone to Recession

Much of that slide came during Berlusconi's second stint as prime minister between 2001 and 2006, when Italy went through three recessions.

Even with Berlusconi's economic record, he has maintained an advantage over Veltroni in opinion polls that has held at between 6 and 9 percentage points during the campaign.

“Italy is the land that resists change,'' said James Walston, a professor of politics at Rome's American University. “Everyone complains, but in the end no one is willing to undergo the sacrifices necessary: for Alitalia it's the job cuts, for the economy it's the public spending it just can't contain.''

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