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Italy: Roman showdown

December 12, 2010

By Guy Dinmore, Published: December 12 2010

Silvio Berlusconi says he no longer looks at newspapers. Italy’s media mogul turned prime minister prefers at times to relieve the stress of high office by partying with beautiful women rather than reading “premature” political obituaries.

This week, however, he will be battling to ensure those obituaries do not come true. On Monday he stands before both chambers of parliament to defend his record on the eve of votes of confidence that could narrowly bring down his scandal-hit centre-right government.

Although no one – probably not even the 74-year-old himself – knows how much time he has left in office, there is a palpable sense that the era of Berlusconismo is approaching its end – just when Italy risks being dragged into the centre of the eurozone debt crisis.

The prospect of the collapse of a government in one of its big economies could heighten financial market nerves at an exceptionally tense time for the continent’s 12-year-old monetary union. Some fear that Italy – until now on the sidelines of the crisis afflicting smaller countries such as Ireland and Greece – could suddenly find itself on the front line.

With this in mind, Mr Berlusconi’s defence is that he is the guarantor of stability who can hold off anxious debt markets, an argument even his rivals grudgingly accept in public (while privately admitting the splintered opposition is not ready for elections). Ironically it is the crisis triggered by the European Union bail-out of Ireland that may yet save him, albeit in a weakened state.

On paper, following last month’s latest defection of long-time allies from his People of Liberty party, the prime minister can no longer rely on a majority in the lower house. But tomorrow’s no-confidence vote in the chamber is expected to be close, with opposition allegations – denied by the government – that wavering deputies have been courted with promises of money and plum jobs.

But one grim certainty for Italians is that with a national debt close to 120 per cent of gross domestic product – and, at €1,800bn ($2,380bn), more than the debts of Portugal, Ireland, Greece and Spain put together – whoever is in charge will have to persist with a policy of deepening austerity and budget cuts, probably for years.

At the same time Italians look back on the 2000s as a lost decade of stagnation instead of the “economic miracle” and “liberal revolution” Mr Berlusconi has promised since he first strode on to the political stage in 1994 as the gutsy entrepreneur and anti-politician who would arrest the national decline.

Summing up the past 10 years – of which nearly eight have been under Berlusconi-led coalitions – Giuseppe Roma of Censis, a think-tank, says uncertainty and “low development” have resulted in a lack of dynamism. While Germany’s economy grew in total by 5 per cent in the past decade, the UK by 13 per cent and Spain by a fifth, Italy has managed a gain of a mere 1.4 per cent, Censis notes.

“Italy’s weaknesses are sluggish growth and debt,” says Mario Draghi, governor of the Bank of Italy and a cautious critic of the Berlusconi record. “To relaunch growth, you need structural reforms to enhance competition in the service sector, to enhance efficiency in the public administration and to improve education. You need to tackle tax evasion and to reduce taxes and you need better civil justice,” he told the Financial Times in an interview in London.

Economic stagnation has been compounded by a slippage in many world rankings, fuelling disaffection in the business community, which had previously backed Mr Berlsuconi to deliver liberalisation. The World Bank’s latest ease of doing business survey ranked Italy – the world’s seventh largest economy – 80th out of 183 countries, one notch above Jamaica. Italy was not among the 85 per cent of countries surveyed to have improved their ratings in the past five years.

When Mr Berlusconi won the second of his three election victories in 2001, Italy ranked 32nd in the worldwide economic freedom index compiled by the Heritage Foundation, a conservative Washington think-tank. By 2010 it had fallen to 74th place. “Overall economic freedom is curbed by ineffective public finance management, considerable corruption and a high tax burden,” it noted.

Anthony Kim, a Heritage analyst, sees the Berlusconi years characterised by “sporadic, cosmetic reforms” marked by conflicts of interest with the media mogul making “subtle policy choices” to protect himself and his associates.

Mr Berlusconi might point out he has shared his compatriots’ pain. Forbes ranked him the 29th richest man in the world in 2001 worth a net $10.3bn. By this year he had slipped to 74th with $9bn.

Professor Christopher Duggan of Reading University in the UK says Mr Berlusconi – should he fall – will leave behind an Italy with “more political and moral uncertainty” than it faced in 1994 when he first entered Rome’s Palazzo Chigi – the elegant prime ministerial office – amid the collapse of the post-second world war political system in party-financing corruption scandals.

“Instead of taking the opportunity to repudiate the value system that had underpinned the First Republic, Italians – with Berlusconi – saddled themselves with all its worst aspects: exaltation of private over public interests, a weak sense of the state, clientelism and corruption,” Mr Duggan says. “Italy is left with little in the way of a political compass.”

Italians today are confused and angry with an elite perceived to place its own interests first, as with Mr Berlusconi’s attempts to pass laws that would cancel or postpone two court cases in which he is accused of corruption and fraud. He denies the charges, accusing politically biased magistrates of undermining his ability to govern.

“All of us then in 1994 knew who Berlusconi was and the problem of the conflict of interests. We were in a way all accomplices when he entered the game,” admits Pier Ferdinando Casini, leader of the centrist UDC party and a former ally who broke with the prime minister in 2008. “We hoped his defects would diminish but instead they multiplied. He got to own more television, not less.” However, he says it would be “madness” to hold elections at a time of European crisis, proposing instead a government of national unity that would need to take unpopular economic decisions.

Mr Berlusconi rejects that option, insisting that, should he lose in parliament or even win by a narrow margin, he would call on Giorgio Napolitano, the head of state, to set the course for elections next spring, two years ahead of schedule.

Few believe elections would resolve the crisis for long. With the main opposition, the left-of-centre Democratic party, riven by disputes, polls of voting intentions show Mr Berlusconi, allied with the rightwing Northern League, taking just over 40 per cent. That would be enough under the deeply unpopular electoral system to secure a lower house majority but possibly not in the upper chamber. The result would be another weak government and the further postponement of any fundamental reforms.

Italy’s arch survivor certainly seems to be leaving open the possibility of forming a new centre-right coalition that would bring in the UDC and the breakaway Future and Liberty party of Gianfranco Fini – a neo-fascist turned centrist – whose long alliance with Mr Berlusconi disintegrated acrimoniously in July.

Despite the uncertainty, debt markets and international ratings agencies appear relatively sanguine over Italy’s ability to escape the contagion stalking the eurozone. Their faith is pinned on the prudent policies of Giulio Tremonti, finance minister and one of several possible contenders to succeed Mr Berlusconi should events force him to step down.

Although spreads between Italian 10-year bonds and their German equivalent have widened to euro-era highs in the past month, yields on Italian 10-year bonds remain below the average of the past decade.

Berlusconi-chart

No national bank has crashed in the 2008-09 recession and, unlike Spain and Ireland, Italy had no pronounced housing bubble to burst. While the public sector debt to GDP ratio is the eurozone’s second highest, Italy’s household debt is less than half that of Spain and Portugal.

Fitch, a rating agency that recently reaffirmed Italy’s solid AA- grading, says that, unlike some of its European peers, Rome has not had to resort to “any significant fiscal stimulus” in the past three years nor “socialise private sector losses”. It judged the banks to be robust thanks to their large retail funding base.

Political uncertainty would become a concern if it threatened fiscal consolidation – something Fitch does not expect. Any weakening of the commitment to fight tax evasion – planned to provide about a third of the projected €25bn deficit reduction by 2012 – or a failure to stabilise spending would also “pressurise the rating”.

Concerns do remain that Mr Tremonti’s growth forecasts are too optimistic, however, and that whoever is in charge next year may require a further budget correction of at least €7bn. Even the finance minister himself admits this is a possibility.

Renato Brunetta, minister for public sector reforms and at the forefront of efforts to reduce costs and boost efficiency, points out that public sector wages have been frozen for the next three years. He has already cut the civil service headcount by 150,000 and is on track to trim a similar amount by 2013 – if the coalition survives.

“That is an 8 per cent cut, proportionally more than the UK,” he says. “We are saving 3 to 4 per cent a year in salaries and without social conflict.”

For Mr Brunetta the political crisis is about leadership and succession – not policy. “It is about personalities, idiosyncrasies, ambitions. This is a leadership problem,” he says. “It cannot go on like this. Either you find a solution or you go to elections to redefine the pieces.”

That could play to the advantage of Mr Berlusconi. He is at his best when campaigning, often successfully playing the victim, concedes Mr Casini. But the prime minister’s former ally dismisses the argument that he is irreplaceable as Italy faces the eurozone storm. “The cemeteries are full of indispensable men,” he says.

Former supporters disillusioned as reform hopes end in embarrassment

Italy’s business leaders were among Silvio Berlusconi’s most fervent supporters when he became prime minister in 1994. They saw the self-made billionaire from Milan as one of their own, writes Rachel Sanderson.

Mr Berlusconi’s media savvy, and his implicit proposal to govern as chief executive, appealed to entrepreneurs and financiers from the industrial north. He would provide an antidote to the self-serving politicking that many of them consider the capital’s trademark.

Equally important, executives say there was also a tacit understanding that, once in the political sphere, the media mogul would leave them to pursue their accumulation of personal wealth just as he had done.

But following a decade or so of low economic growth, amid political stagnation, low competitiveness and sex scandals, the mood has soured.

Sergio Marchionne (above), the outspoken chief executive of the Fiat-Chrysler, carmaking group, recently publicly voiced a damning view of Italy that is privately shared by many of Mr Berlusconi’s critics.

“[It is] an embarrassment to go around the world and explain what is going on in this country,” said Mr Marchionne, a Canadian-Italian who is trying to push through the kind of labour reforms Mr Berlusconi promised but has failed to deliver.

Other businesspeople do not take so severe a view. They see the prime minister’s sexual proclivities more as a ribald joke than a cause of shame. One senior banker describes them as an “icebreaker” in meetings outside Italy that “always gets a laugh”.

Giulio Tremonti, Mr Berlusconi’s finance minister, also remains highly regarded among the business elite, having guided Italy relatively serenely through the economic crisis.

Others point out that, under Mr Berlusconi, there has been greater political stability than at any time since the second world war. There is persistent doubt, even among detractors, that there is anyone better to replace him, especially at a time of mounting concern about Italy’s sovereign debt.

But frustration at the prime minister’s conflicts of interests, and his failure to dispel the view that he focuses on his personal and business interests at the expense of passing wider economic reform, is widespread.

After months of political paralysis, Diego Della Valle, one of Italy’s most successful luxury goods entrepreneurs, recently spoke for many in business when he aired his disillusionment with the entire political class. Having been failed by politicians it was up to Italian business to help itself, he said.

A sense of disenfranchisement is also apparent in the small community of women in business. While Mr Berlusconi has put showgirls into parliament, the 2010 World Economic Forum global gender gap report puts Italy in 74th place, the worst in Europe and down seven places, in terms of equality in the workplace.

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