Berlusconi really must go

July 13, 2011

By Hugo Dixon
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Silvio Berlusconi really must go. It’s no longer about abuse of power and “bunga bunga” sex parties. His continuation as Italy’s prime minister could drive the country into a financial death spiral. His own supporters are shaken and the public is afraid. But the left-wing opposition is behaving responsibly, so there’s some hope.

Italy pulled back from the brink — slightly -– on July 12. After nudging above 6 percent, the yield on 10-year government bonds fell back to a still uncomfortable 5.6 percent. Part of the explanation is that the opposition agreed to a fast-track parliamentary vote on the government’s new austerity program. The multi-year fiscal squeeze of more than  40 billion euros should therefore be approved by the end of the week.

But this is not enough. Berlusconi is in virtual open warfare with Giulio Tremonti, his finance minister. Even though things have been patched up for now, the idea that this dysfunctional government could serve out its term until 2013 is troubling. Italy could lurch from mini-crisis to mini-crisis – with the borrowing cost on its debt, currently at 120 percent of GDP, ratcheting ever higher. The more Rome is perceived by financial markets to have fallen behind the curve, the bigger the fiscal adjustment will have to be to get it back on track.

Italy is too big to bail out. But it is a rich country — which can be bailed out by its people. That also means Italians have a lot at stake if the country goes down the tubes. In the past they have been far too complacent about their country’s political and economic mess. The mini-scare over the last few days is, therefore, salutary. It may help concentrate minds about the need to make some medium-sized sacrifices now -– such as front-loading the austerity program, much of which will only kick in from 2013 — in order to avoid bigger sacrifices in the future.

Now, there’s the small question of how to ease Berlusconi out of power. He’s extremely unlikely to fall on his sword. Indeed, he has continued to use the remaining vestiges of his influence to save his own skin rather than the country’s -– as witnessed by his recent attempt to pass legislation to delay the payment of a 750 million euros fine in connection with a 20-year-old scandal. So Berlusconi will have to be pushed out by members of his own right-wing coalition, which has a thin majority. There might just be a chance of this happening if market jitters continue.

Then, of course, there’s a question of whether Berlusconi would be replaced by anyone better. There are, broadly speaking, two options: a grand coalition led by a technocrat such as Mario Monti, the former European Commissioner; or early elections. The first might be a reasonable outcome, securing some short-term stability. But a technocratic government wouldn’t have a mandate to push through the long list of structural reforms and constitutional changes that are needed to kick-start growth in this sluggish economy. For that, new elections would be required.

Elections in the heat of the euro zone crisis would certainly be risky. The markets could get the real heebie-jeebies if the campaign turned demagogic. The current crisis could trigger a realignment of politics, and produce a new centrist coalition or even a catharsis of the system. But it could just as well lead to a stalemate, with no clear winner.

That said, Italy will have to confront its political problems at some point – and sooner is better than later. A little more fright now might be just what’s needed to shake the electorate out of its complacency.

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Mr. Berlusconi has been elected in and out office so many times, I have lost count. It is possible that the Italian people will demand yet another ouster of Mr. Berlusconi in their anger of his selfishness. But, it is also possible that he could be elected back into office again as has happened in the past. He’s been forgiven many times. I am curious: Who would you recommend be in his place?

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