ROME—Even a politician with the survival skills of Silvio Berlusconi proved, in the end, to be no match for the power of global financial markets. The embattled Italian prime minister bowed to the reality of international pressure and withering domestic support on Tuesday, promising to resign once parliament passes a reform package of cuts aimed at reeling in a runaway debt crisis.
The question now is whether Berlusconi’s departure would be enough to arrest the decline in Italy’s perilous financial condition, which has moved the front line of Europe’s debt crisis from peripheral countries like Greece and Ireland to one of its central economies.
His promise to resign came after a humiliating failure to muster enough votes in a mostly symbolic budget vote, making clear he had lost the parliamentary majority needed to rule. Even so, Berlusconi said he would not leave until lawmakers passed an unpopular economic reform bill catering to European partners who have demanded deep cuts in spending in return for help financing its $2.6 trillion debt.
It remains to be seen whether a deeply divided parliament can pass that package of reforms, which includes selling some state enterprises and loosening labor laws. Opposition to the austerity measures remains strong, a fact Berlusconi seized on to hold out hope that he could compete, and win, should new elections be necessary.
Yet for all the scheming of Italian politics, the latest turn of events didn’t bring Italy—or the euro zone that fears a contagion—any closer to resolving the sovereign debt crisis.
Berlusconi’s offer to step down gave an immediate lift to stock markets in the US and was likely to be welcomed in Europe as well on Wednesday. Many have come to regard the flamboyant—and sometimes reckless—politician as a major obstacle in shoring up investors’ confidence that Italy’s financial problems can be contained.
But in some ways, Berlusconi has been a sideshow. The main attraction, or worry, is that Italy, the world’s eighth-largest economy, has seen stagnant growth for more than a decade and is increasingly at risk of a financial collapse. And so far, it has taken few steps to implement changes.
Berlusconi’s opponents hailed the agreement of his promised departure, calling it a turning point. But his supporters said little had changed. “Do you really believe that once Berlusconi leaves, everybody will suddenly become smarter and miraculously get the touch to change this country?” asked Deborah Bergamini, a parliament member, who said she talked with Berlusconi after he had made his decision to step down. “He said to me, ‘We had to accept the fact that due to some defections, the daily operating efficiency of the parliament was not guaranteed....’ Hearing him, he was calm and peaceful. I felt he was relieved.”
The same can’t be said for those tracking Italy’s finances. Italy’s public debt exceeds $2.6 trillion—or about 120 percent of the nation’s economy—the second-largest in Europe after Greece, where a new government is expected to be announced on Wednesday afternoon amid its own financial crisis. Italy’s debt has climbed steadily over the years as the Rome government continued to provide generous social welfare and make other expenditures—much of that lost to waste and corruption, many say—while financing it with government bonds.
When rates were low, Italy could get by. But the yield on long-term Italian bonds has been rising sharply in recent weeks, making it more costly for Italy to borrow and support its debts, thus boosting the risk that it could default or need a bailout from the euro zone like Greece, Portugal and Ireland. But Italy’s economy—and debts—are much larger than those other euro- zone countries. Italy has the world’s third-largest bond market after the US and Japan, with banks in Germany, France and other nations facing heavy exposure.
And euro-zone leaders thus far have been unable to raise anywhere near the amount of funds needed to rescue Italy. The worry is that if Italy’s finances collapse, the problems will not only spread to northern Europe but to the US, sending the entire global economy into recession.
“What the markets are wondering is, ‘If you can’t deal with the Greek crisis, what on Earth are you going to do if it spills to other parts of Europe,’” said Fredrik Erixon, director of the European Center for International Political Economy in Brussels.
To ease investors’ fears, European leaders last week forced Berlusconi to accept monitoring of Italian finances from the International Monetary Fund. And the European Commission is expected to arrive in Rome on Wednesday to discuss details of the reform measures to bring down Italy’s debt, which also include such proposals as reductions in public spending and cuts in social welfare.
The vote on the reform package had been expected to be held next week, but Tuesday’s developments left the timing unclear. Analysts said further negotiations would take time. For example, Berlusconi’s closest coalition ally, Umberto Bossi, has strongly opposed raising the pension retirement age from 65 to 67. Despite Berlusconi’s promise to resign, not everybody was convinced that he would actually quit when the time comes. In fact, Berlusconi may have even more reason to try to stay on because he could take credit for pushing through necessary national reforms, said Sergio Fabbrini, political science professor at the LUISS Guido Carli University in Rome. “In the last 10 to 15 years, he has said and changed his mind often,” Fabbrini said. “I wouldn’t say Berlusconi is finished.”
