August 05, 2011, 5:24 AM EDT

By Chiara Vasarri

Aug. 5 (Bloomberg) — Italy’s economic growth gained pace in the second quarter, with the recovery of Europe’s fourth- largest economy now threatened by the sovereign-debt crisis.

Italian gross domestic product rose 0.3 percent from the first quarter, when it increased 0.1 percent, Rome-based national statistics institute Istat said in a report today. That matched the median forecast of 20 economists in a Bloomberg News survey. GDP advanced 0.8 percent from a year earlier. Industrial output unexpectedly fell 0.6 percent in June from May, when it declined the same amount, Istat said in a separate report.

Prime Minister Silvio Berlusconi is struggling to convince investors that Italy won’t become the next victim of Europe’s sovereign crisis as Italian bond yields surge. The nation has the region’s second-biggest debt burden after Greece. Parliament last month passed a 48 billion-euro ($68 billion) austerity package to shield the country from the turmoil and balance the budget by 2014.

The premium that investors demand to hold Italian 10-year bonds over German equivalents reached a euro-area record 416 basis points today before declining to 399 basis points at 10:35 a.m. in Rome. Spanish 10-year bond yields fell nine basis points to 6.20 percent as of 9:13 a.m. in London.

Spain’s economic growth slowed in the second quarter, adding to the government’s difficulties as it struggles with soaring borrowing costs and the euro region’s highest unemployment rate. GDP expanded 0.2 percent from the first quarter, when it grew 0.3 percent, the Bank of Spain in Madrid estimated today. From a year earlier, GDP rose 0.7 percent.

Italy’s industrial output data showed a decline in consumer goods, indicating exports are driving the recovery. Production of consumer goods declined 1.1 percent in June from the previous month, led by a 2.3 percent drop in durable goods, Istat said.

Enel Results

Enel SpA’s first-half profit unexpectedly climbed as Italy’s largest power company reported increased sales in Latin America, Russia and France. Net income gained 5 percent to 2.55 billion euros ($3.65 billion) in the quarter, the Rome-based company said on Aug. 3. New generation capacity in Russia and Iberia will help sustain earnings in months to come, Enel said. goods, Istat said in the report.

Confidence in Italy has been further shaken by political turmoil, with Berlusconi’s grip on power weakened by corruption allegations against him and some of his main allies. Berlusconi on Aug. 3 blamed turmoil in international markets for the slump in bonds and said that markets were mispricing risk.

Growth Drive

Berlusconi and Finance Minister Giulio Tremonti yesterday met with unions, banks and executives in Rome to find common ground for efforts to boost growth and tame public finances. Berlusconi said he believed the debt crisis won’t get worse, while Tremonti said the government’s priority is overhauling the tax and welfare systems.

“While in the U.S. you need one or three or four acts to open a business, in Italy you need 70 — between 50 and 70 to open a new business — and this is a great obstacle to opening new businesses, to the growth of the country,” Giovanni Fiori, an economics professor at Luiss University in Rome, told Bloomberg Television’s David Tweed in an interview.

Berlusconi may move up the introduction of a tax overhaul, part of the austerity package, to speed the closing of loopholes and deductions worth 25 billion euros ($35 billion), Ansa said. The government may also cancel as much as 15 billion euros of spending planned for this year, Il Sole 24 Ore newspaper said yesterday, citing no one.

The Bank of Italy expects Italian growth to continue to lag behind the euro-area average for the next two years, Bank of Italy Governor Mario Draghi said on July 13. Austerity measures won’t be enough for Italy and other euro-region countries to reduce debt if not accompanied by policies to boost economic growth, the European Central Bank’s incoming president said.

“Business surveys over the last few months point to a clear loss of momentum in both manufacturing and service activity going ahead,” said Chiara Corsa, an economist at UniCredit Research in Milan.

–With assistance from Angeline Benoit in Madrid and Giovanni Salzano in Rome. Editors: Jeffrey Donovan, Andrew Davis

To contact the reporter on this story: Chiara Vasarri in Milan at cvasarri@bloomberg.net.

To contact the editor responsible for this story: Angela Cullen at acullen8@bloomberg.net.