Berlusconi Resigns and Italy Faces Tough Choices

Arjun Dave
12 Nov, 2011
New York City

Prime Minister Berlusconi resigned fulfilling his pledge after lawmakers approved the reforms demanded by the EU. However, Italy runs the real risk of leaving from the euro zone in the next eighteen months or restructuring bonds as calls for more cuts grow louder and rates stay higher.

[R]5:50 PM New York – Prime Minister Silvio Berlusconi resigned fulfilling his pledge after lawmakers approved the budgetary reforms demanded by the EU and international lenders. However, Italy runs the real risk of leaving from the euro zone in the next eighteen months or restructuring bonds as calls for more cuts grow louder and interest rate stay higher.[/R]

Italy’s Prime Minister Silvio Berlusconi resigned after lower house of the parliament passed austerity measures demanded by the international lenders and the European Union.

Italy’s lower house passed a list of austerity measures demanded by the European Union late Saturday raising hopes for an era post-Berlusconi that may set the economy on a different course.

The clear vote of approval was in the numbers and 380 members were in favor, 26 rejected and the rest abstained in today’s vote at the Chamber of Deputies.

The measures were earlier passed by the Senate on Friday in a 156-to-12 vote where opposition parties, the Democratic Party and Christian Democrat Centre Union, abstained.

Prime Minister Berlusconi resigned after the vote and fulfilled his pledge a few days ago.

The tumultuous week in Italian politics turned upside down the conventional forces and nearly impossible task of reorganizing government finances. The pressure from outside forces finally dislodged Berlusconi from the office but not from the political scene.

The long hoped fiscal fitness discipline will be finally imposed after external pressures from European authorities, international lending agencies and the regional central bank.

The passage also paves the way for Italian President Girogio Napolitano to form a new government that is widely expected to be headed by the former European Union Commissioner Mario Monti.

Monti Faces Challenges

Monti, the front runner for the interim government is expected to hasten the implementation of the tough austerity measures in the next three months before the elections can be scheduled.

However, Monti will need support from the divided lawmakers in the People of Freedom party and is reported to enjoy support of multiple opposition parties.

The road ahead for the new technocrat Monti-led government is clear but not easy and many current law makers are not expected to support the newly formed government and prefer early election.

Several factions of the governing party of People of Freedom or PdL and the Northern League are openly hostile to the technocratic government and prefer earlier elections.

However, Berlusconi is expected to play a key behind-the-scenes role in the new government and position his party for the next election. Berlusconi has no choice but to stay close to the levers of power as he battles at least four serious court cases.

Moreover, the tough austerity measures are not going to be enough for Italy. And here are the reasons why?

Difficult Math

Italy needs at least €300 billion in new debt to rollover the annual debt that comes due and also adds another €30 billion in new debt. The near stagnant economy for a decade does not create enough new jobs or increase productivity that generates more income for the state.

The surge in the interest rates in the last six months, from as low as 3.3% to 6.5%, has added to the cost of the debt to the treasury. And Italy has just unleashed the virtual spiral of more cuts leading to lower revenues that beget more cuts.

Sooner or later these budget cuts will seep into the economy and debt-to-GDP ratio will begin to rise instead of falling as demanded by international lenders.

Italy runs the real risk of leaving the euro zone in the next eighteen months or sooner.