Divisions at the heart of government are costing Italy the confidence of the world.
Italy's prime minister Silvio Berlusconi (L) and finance minister Giulio Tremonti are rivals Photo: AFP
By James Walston
8:58PM BST 11 Jul 2011
26 Comments
For those of us not versed in the dark arts of accounting or international finance, there is little more solid than money; I have it or I don’t, I can borrow it or lend it and measure it down to the last penny. But confidence is an altogether different commodity, far more abstract and difficult to gauge. This week, Italy is trying to persuade us that the world should have confidence in both its political and its financial stability. It will not be easy.
The ratings agencies’ evaluation of a country’s creditworthiness are one measure of stability; another is investor confidence in the bond markets about Italy’s solvency. On both scores, the omens are getting worse for Italy day by day.
Until recently, Italy had avoided the worst of the world and European crises. There was no housing bubble, as Italian banks demand copper-bottomed collateral before they will lend the ordinary housebuyer a cent. There were almost no toxic assets, as banks are amazingly conservative in their investment policies.
Once upon a time, few Italian bankers spoke a word of English; today most speak the words and grammar, but to their credit they don’t speak the language of the City or Wall Street, or that of the innovative financial operators who filled the market with dubious products over the past decade.
Despite a declining economy, Italians still save; private saving is among the highest in Europe. Its debt is the second highest in Europe – at 120 per cent of GDP – but its budget deficit is not outrageous and is close to balanced when interest payments are taken out. Italy seemed condemned to a slow and fairly dignified relative decline, a bit like Venice in the 19th century. But the workings of the financial markets are not slow and Berlusconi and his government are anything but dignified, so Italy’s fate is rather different.
Related Articles
Italy contagion fears hit markets - 11 Jul 2011
Italy and Spain must pray for a miracle - 10 Jul 2011
Key future events in the eurozone debt crisis - 10 Jul 2011
Italy's economy: in graphs - 10 Jul 2011
European markets slide over Italy stability fears - 09 Jul 2011
The problem is leadership. Silvio Berlusconi won elections not just because he owns half the country’s television stations (though that helps), but because he projects optimism. He has always been very careful not to deliver bad news himself and is highly critical of anyone in the opposition who suggests that all is not well economically.
But for the past year, it has been a hard act to keep up; and that is not because he is accused of having sex with under-age prostitutes nor even that he is on trial for having set up slush funds, nor for paying the English lawyer David Mills to perjure himself, nor for paying a judge to award him Italy’s biggest publisher in a takeover case. In any case, his supporters either don’t believe the accusations, or they don’t care if they’re true.
His optimism falls flat because there are too many Italians underpaid, unemployed, or underemployed; too many companies are either struggling or have given up the ghost. In Italy, he is no longer credible and abroad, the EU, the ECB and the ratings agencies look at Italy’s debt and wonder where it will end.
Enter Giulio Tremonti. The finance minister has rarely been far from centre stage, but now he spends more time there than Berlusconi. He arrived, like a good portion of Berlusconi’s ministers and parliamentarians, as a business associate, his principal accountant. But unlike other ex-employees, Tremonti has never been a yes-man and has earned a reputation for solid if not hugely innovative policy. He left the cabinet over policy differences in the last Berlusconi government and for most of this legislature he has been closer to Berlusconi’s coalition partner Umberto Bossi, and making thinly veiled moves towards succession.
Over the last year, Tremonti has repeated that Italy needs to reduce its debt and that an austerity package was inevitable. Berlusconi, in contrast, has been trying to deal with declining approval ratings and an increasingly divided coalition. Obviously he is less than enthusiastic about an austerity budget. He has to manoeuvre between the EU rock and the Tremonti hard place. He knows that if he fires Tremonti, international wrath would follow. Last month, Berlusconi said pointedly that cabinet decisions were collective and Tremonti could not dictate a budget; last week he accused Tremonti of “not being a team player”.
Tremonti does his best to make himself unpopular – he called a cabinet colleague “a cretin” in a stage whisper in front of an open mike during a press conference. He is alone in the government but has some support from business and the Church. If he was forced to resign, then he would be in a good position to put himself forward as an economically safe alternative to Berlusconi. His only problem is a criminal investigation into one of his close staff at the ministry, who was also putting up his boss rent-free in an €8,500 per month flat.
Beyond the personal and policy differences between the men, there are big divisions between Berlusconi’s People of Freedom and Umberto Bossi’s Northern League. Berlusconi knows that he must reduce the deficit, but Bossi is just concerned about how to stop the hæmorrhage of votes and knows that austerity does not win elections.
This week parliament starts debating Tremonti’s €47 billion budget. It should have calmed markets but in the discussions, the main issues were lost. It is a fudged budget – first, most of the cuts will affect the next government: €2 billion this year, €5 billion in 2012, and €20 billion each in 2013 and 2014 – with elections due by April 2013 at the latest.
Second, most of the cuts are regressive – higher health charges, fixed, whatever your income; cuts to medium range pensions, and cuts in payments to local and regional authorities, which provide much of Italy’s social security and health service.
There is no certainty that even these cuts will be implemented – government amendments are likely, “to improve the Bill” said one spokesman, thus reducing the pain. Tremonti has said that anything is possible but overall savings must stay the same.
But even in this time of national crisis the prime minister cannot resist inserting clauses designed to shore up his friends and businesses. He has been trying to stop his Fininvest empire being forced to pay €560 million in damages to the industrialist Carlo De Benedetti, historically one of his fiercest rivals.
This blatant example of Berlusconi’s conflict of interests was removed once from legislation after an outcry and the preventive intervention of the president of the republic. Now there are suggestions that it might be reintroduced. Neither Moody’s nor the ECB, nor, one presumes, Chancellor Merkel who spoke to Berlusconi yesterday, had this in mind when they pressed for an austerity budget.
So there are many obstacles before even this budget passes, and if it is not implemented, the confidence problem remains. If it is passed more or less in its present form, then confidence will remain fragile but intact.
If Tremonti is forced to go, if the Northern League decides it is better off in opposition, if parliamentarians worried about having to face an electorate reduce the cuts, then that confidence will break and the future would be very bleak for Italy and for Europe, too.
However bad the Greek crisis is, its economy is tiny. Italy is the third biggest economy in the eurozone, with a massive debt that it has difficulty servicing. The only answer would be radical changes in the economy and to implement those, there would have to be radical changes in politics, not just to the present leadership but to most of the discredited political class.
Every Italian generation since the beginning of the 20th century has reinvented its politics, usually under pressure from outside forces – world wars, 1968 and the end of the Cold War. Italy may now be approaching one of those moments.
James Walston is Professor of Politics at the American University of Rome
No comments:
Post a Comment