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.