Silvio Berlusconi

Politics of debt stymies Italy

PUBLISHED : Saturday, 02 March, 2013, 12:00am
UPDATED : Saturday, 02 March, 2013, 3:30am


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Italy's European partners had hoped for a new government in Rome with the electoral legitimacy to complete the economic reform and austerity measures launched by outgoing Italian prime minister Mario Monti. In the event, they get the opposite. The Italian electorate rejected further austerity and delivered an inconclusive election.

There may still be a chance that the centre-left Democrats could break the deadlock with Silvio Berlusconi's centre-right group and the Five Star Movement of comedian Beppe Grillo. But it looks unlikely after left-wing leader Pier Luigi Bersani ruled out this week a grand coalition with the former prime minister.

If efforts to form a coalition fail, the euro zone's third largest economy is set for a short-term government and new elections within a few months, creating exactly the kind of uncertainties that the bosses in Brussels and Berlin had wanted to avoid.

Perhaps surprisingly, markets have not been unduly rattled. Initial falls in European stock markets and a rise in Italy's bond yield have been reversed, but the euro has weakened about 1 per cent against the US dollar over the week. But these are still early days. If it looks like the country will not be able to form a government committed to resolving its fiscal problems, the danger is that it will revive the euro zone debt crisis.

Since the outbreak of the crisis, Ireland, Spain and Portugal have produced governments willing to follow fiscal reform measures favoured by Brussels and the European Central Bank. Even Greece has a coalition following two bruising elections last year that are committed, however imperfectly, to reforms. Monti's caretaker government is precisely the kind of technocratic administration the EU honchos favour. But it has little political legitimacy; and now, with just 10 per cent of the votes, Civic Choice, his pro-reform centrist alliance, has been repudiated by voters.

Perhaps, like Greece, Italy too will eventually produce an imperfect but workable coalition. It is, after all, in far better economic condition as its key industries are still vibrant and most of its banks are solvent. Economically, it is not going the way of Greece.

But the latest election in Italy again exposes the heart of the euro crisis and its mismanagement. It is not just an economic but a political crisis, and no solutions favoured by technocrats will work for long if they lack support from citizens whose livelihoods have been most adversely affected.