But in Italy’s case, normal is the problem. The only mystery is how Rome got away with so much borrowing and spending for so long.

Here are the facts: Italy is the third-largest sovereign borrower in the world, after the U.S. and Japan. Its debts currently total more than 120% of GDP. Its official economy has essentially not grown at all in 10 years. Its population is in decline, and its business-regulatory environment is one of the worst in the developed world. Resort to the black market to avoid regulations and evade crippling taxes is routine.

Finance minister Giulio Tremonti and Italian Premier Silvio Berlusconi

Government spending in Italy has hovered around 50% of GDP for decades, even before the baby-boomer retirements that are now adding to the burden. Retiree pensions and benefits now equal 14% of GDP. Italy is the second-grayest nation in the OECD (Japan is number one) and already has only 2.6 working-age people per retiree. As of 2008 more than a quarter of the Italian labor force was employed by the state in some capacity, earning on average 15.2% more than their private counterparts.

Rome has now frozen civil servants’ pay and is raising to 65 from 60 the age at which women can retire on pensions. But three years of negotiating still haven’t overhauled a collective-bargaining system that controls employment terms for most government jobs and 80% of the economy.

The Wall Street Journal Europe editorial page editor Brian Carney on the sovereign debt crisis and the stock market plunge. Also, Ohio University economist Richard Vedder discusses how colleges measure up based on their educational outcomes.

In the decades before Italy’s adoption of the euro in 1999, the country’s usual response to its excessive debts and uncompetitive labor costs was the periodic devaluation of the lira. With that outlet unavailable today, some sort of blowup was inevitable in the absence of serious economic reform.

Responding to the recent blowout in interest rates, Prime Minister Silvio Berlusconi and Finance Minister Giulio Tremonti have said they will accelerate budget cuts and structural reforms to promote competitiveness, investment and growth. It sounds like breaking news from 1994. That’s when Mr. Berlusconi first entered office vowing market liberalization and a smaller state. Italians—and the markets—would be forgiven for being cynical this time around.

Mr. Tremonti on Friday promised “the mother of all” labor-market liberalizations. Nothing less will do. It’s either impossible or prohibitively expensive to fire most Italians, and a byzantine system of certifications and qualifications for the likes of IT techs and journalists go even further to protect vested interests and discourage competition for jobs or business.

Messrs. Berlusconi and Tremonti have their work cut out to upend Italy’s perverse incentives before creditors demand premiums that Rome can’t pay. The alternative leads to austerity, default and, eventually, to Athens.