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Italy faces prolonged political uncertainty

December 13, 2010

By Guy Dinmore in Rome,  Published: December 13 2010
Whether or not Silvio Berlusconi’s centre-right government survives its parliamentary showdown on Tuesday, Italy appears on course for a prolonged period of political uncertainty that has international debt markets worried but not panic-stricken.

Even hardened opponents of the 74-year-old tycoon prime minister credited him with a solid performance in defending his record in the senate on Monday, conceding that he might just scrape through votes in both chambers.

ChartIndeed, as allegations of betrayal and vote-buying flew back and forth, the biggest political casualty of this week could turn out to be Gianfranco Fini, the reformed neo-fascist whose challenge to Mr Berlusconi after 16 years of close alliance triggered the centre-right’s internal crisis.

Mr Fini, a co-founder with Mr Berlusconi of their People of Liberty party last year, was due on Monday night to rally fellow rebels in their breakaway Future and Liberty faction which is at risk of splitting between anti-Berlusconi hawks and conciliatory-minded doves.

But, as Umberto Bossi, veteran leader of the rightwing Northern League and a Berlusconi loyalist, pointed out on Monday, a majority of one does not make for stable government.

A victory will not disguise the fact Mr Berlusconi and his government have been seriously weakened by scandals. Still, Mr Berlusconi is in no mood to quit and there is no clear successor in sight in spite of political support emerging for a new market-pleasing centre-right administration led by Giulio Tremonti, finance minister.

In spite of the uncertainty in the midst of a eurozone crisis and a general perception that Mr Berlusconi has little chance of seeing out his full five-year term, markets are taking events in their stride. Mr Tremonti’s deficit-cutting austerity package has helped protect Italy from the worst of the eurozone storm, with little social unrest, and analysts tend to agree that whoever leads the country next will have to stick to these plans.

Milan’s stock market, one of Europe’s perennial underperformers, rose in line with other EU bourses on Monday. The spread between Italian and German 10-year bonds widened but remained below peaks reached last month after Ireland’s bail-out.

Nonetheless analysts warned that political instability was likely to undermine Italy’s long-term commitment to implementing painful austerity measures and structural reforms needed to enhance economic growth that has languished well below the eurozone average for the past decade.

Standard & Poor’s rating agency last month projected a stable outlook for Italy with public sector debt peaking close to 120 per cent of GDP next year. But it warned that potential political instability could be a key risk for future fiscal and economic policy.

“The increasing fragility of the current governing coalition makes implementing growth-enhancing structural reforms politically more challenging in the near term. As a result of this inflexibility, low productivity growth, and a steady erosion of international competitiveness . . . the economy’s capacity to create jobs and growth is low,” the agency said at the time.

Early elections are unlikely to resolve the stalemate, with commentators noting that Mr Berlusconi’s greatest political failure has been to build a solid centre-right party even after securing Italy’s largest postwar parliamentary majority in the 2008 elections.

The centre-left opposition Democratic party is also in disarray, with the net outcome an increasingly disillusioned electorate tending to abstain from voting or moving towards smaller parties at each extreme.

Alessandra Ghisleri, a pollster for Euromedia Research who has carried out surveys for the Berlusconi camp, said Italians were divided over the need for new elections.

If elections were held today, Mr Berlusconi’s party would take 28-30 per cent of the vote, well down on the 38 per cent it won in 2008, she told reporters in Milan. The centre-left Democrats are polling 24-26 per cent, compared with 33.6 per cent two years ago.

Mr Fini’s new party is seen as struggling to get over the 4 per cent threshold needed to enter parliament, while the Northern League would take votes from Mr Berlusconi and the centre-left.

Commentators said such polls pointed to a divided parliament, with Mr Berlusconi winning in the lower house but failing to secure a majority in the senate. The rising influence of the hardline Northern League would also complicate any efforts to build a viable coalition with moderates.

Additional reporting by Rachel Sanderson in Milan

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