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Thursday, October 27, 2011

Italy, Berlusconi pushed to the brink

Italy’s stability, as well as the leadership of its flamboyant prime minister, both hinge on a set of fiscal reforms, which were hastily concocted and delivered to the latest installment in Europe’s perpetual emergency summit on Wednesday.

A letter delivered by Silvio Berlusconi to European Union leaders in Brussels promises to balance the country’s budget by 2013, increase the age of retirement to 67, and raise €5-billion annually in asset sales.

“We are aware that our debt is too high and our growth is too limited,” Mr. Berlusconi said in the letter.

While the EU has insisted on austerity in exchange for support of Italy’s debt, Mr. Berlusconi has faced resistance within his fractured governing coalition.

And according to at least one Italian newspaper, parliamentary agreement on economic reform required Mr. Berlusconi pay the steepest of political prices — his resignation.

Already scandalized by sexual improprieties and allegations of corruption, the 75-year-old leader’s domestic mandate has been on the wane for some time.

Internal tensions flared up this week when government officials came to blows with opposition legislators over the reform plan.

Mario Draghi, Italy’s chief central banker who is set to take over as head of the European Central Bank on Nov. 1, called the situation in Italy “confusing and dramatic.”

With the eurozone’s largest sovereign bond market, Italy’s public debt has climbed to €1.9-trillion, amounting to 120% of its national production.

Yields on 10-year sovereign bonds sit at almost 6%, near the level that prompted intervention by the ECB in August.

The prospect of Italy falling to contagion would prove a vastly greater problem than that of the insolvency of Greece, whose debt load and economic strength is paltry by comparison.

As in Greece, the ECB intervention was made conditional on Italy passing a series of budget reforms.

But with deepening divisions in the centre-right coalition, and with Mr. Berlusconi’s chief political ally, the Northern League, intent on diluting fiscal reform, the proposals faltered.

As a result, confidence in Mr. Berlusconi’s authority suffered.

“Either this government is able to take structural reforms or we need another government,” said Mario Baldassarri, a former Berlusconi ally.

Italian President Giorgio Napolitano said the country cannot afford a leader that does not grasp the urgent need for budget reform.

“We can no longer dither over the categoric imperative of making a consistent and constant effort to lower our debt,” he said.

International reprimand followed. Mr. Berlusconi subsequently lashed back at the perceived interference in Italy’s affairs.

But the expectations for Wednesday’s summit were made clear.

“Our Italian friends know well that we have to assume that we will be informed this evening that there will be significant structural consolidation efforts from Italy. That is a must,” said Eurogroup president and Prime Minister of Luxembourg, Jean-Claude Juncker.

Mr. Berlusconi’s letter of intent appeared to at least propose such significant efforts.

But in order to secure the support of Northern League leader Umberto Bossi, the prime minister offered his resignation by the end of the year and agreed to early elections, according to newspaper la Repubblica. The prime minister’s office has denied the report.

For his part, Mr. Bossi has expressed doubt at the prospect of the coalition surviving.

Financial Post

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