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ROME/MILAN (Reuters) - A long stalemate since Italy's inconclusive election has left government departments in Rome becalmed until a new administration arrives and powerless to respond to increasingly desperate calls for action from business leaders.
More than 40 days have passed since the parliamentary election, with rival centre-left and centre-right leaders Pier Luigi Bersani and Silvio Berlusconi and the populist 5-Star Movement led by ex-comic Beppe Grillo no closer to an accord that would allow a government to be formed.
Although bond markets have not fallen into panic as many had feared, hopes have been shelved of any early attack on problems ranging from slashing bureaucracy and overhauling the cumbersome public administration to boosting employment among the young.
"I don't care about the political colour (of a possible government), I am beyond that. They can choose the left, the right or the comedian. But we need decisions," said Paolo Galassi, a 56-year-old entrepreneur whose company makes aircraft components.
"How is it possible that politicians cannot see that we need to address the economic situation?" he said.
Italy's economy is falling ever deeper into recession and public finance targets have begun to slip, with the 2013 budget deficit now expected to scrape in just under the European Union limit of 3 percent of gross domestic product.
The government has slashed its forecasts and now expects the economy to contract by 1.3 percent this year, and officials say even that target is optimistic, meaning unemployment will continue to rise and efforts to cut the 2 trillion euro (1.7 trillion pounds) public debt will falter.
The situation facing companies is worsening. More than 12,400 went out of business last year, 33 percent more than in 2009, according to business information provider Cribis D&B.
In the last quarter of 2012 dismissals were up 15.1 percent from the same period of the year before, according to Labour Ministry data.
Until a new government is formed, Prime Minister Mario Monti remains in office at the head of a caretaker administration but activity on major reforms that would need strong political direction has come to a stop.
"We're just doing 'ordinary administration', which in effect means most people are just filling in time or working on their own personal projects," said an aide to one minister. "You look along the corridors and it's completely dead."
Even if the deeply divided parties patch up some deal, it is likely to produce a coalition so fragile as to be incapable of tough and unpopular reforms, said Alberto Mignardi, director general of the Bruno Leoni Institute, a market-friendly think-tank.
"Getting reforms done in Italy today, in this political situation, is not possible. The conditions just aren't there."
A weekend agreement to release 40 billion euros to settle unpaid bills owed to private sector suppliers was a rare sign of movement from the caretaker government, which had been trying to get the measure through for months.
Although the accord may ease some pressure on cash-strapped companies, the complex procedures involved in releasing the money points to wider problems such as the urgent need to overhaul an unwieldy public service.
"There are some issues that can be taken on in the short term, like this issue of unpaid bills, but there are other questions that need a deeper response - reviving investment, improving competitiveness, creating conditions for jobs, cutting taxes, reorganizing public spending," said Claudio Giovine, head of industrial policy at small business association CNA.
"All these sort of things are issues for the medium term, they're not questions that can be resolved from one day to the next, they need significant political consensus," he said.
The European Central Bank's pledge to support countries on the bond markets has so far staved off the panic seen during the last serious political crisis, which drove Berlusconi from office in 2011 and nearly broke the euro zone apart.
That has calmed fears of a crisis that could undermine Italy's public debt pile and pose a new threat to the stability of the euro zone but it has left the underlying issues that make Italy so vulnerable to market turmoil no closer to resolution.
After more than a decade of stagnation, Italy's economy is now smaller than it was in 2001. Problems ranging from lack of competitiveness, a towering public debt and weak political institutions have been evident for years.
However, without a deep reform of political institutions it is unclear a new government on its own can make much progress without the kind of underlying consensus which the current crisis has shown to be lacking.
"Italy's political class, as a whole, is losing trust more and more," said Angelo Fracassi, an entrepreneur active in the medical diagnostic sector.
"Maybe the only solution is to have a government which is made partly of technocrats and politicians, with some bipartisan figures. Then we could vote again in six months time."
Editing by Paul Taylor