MacroScope

Italy’s High Noon

By Mike Peacock
September 9, 2013

Silvio Berlusconi’s political future – upon which both Italian and euro zone stability rest to varying degrees – is up for debate when a Senate committee meets on Monday to begin discussions that could end with formal procedures to expel him from the Senate. Talks could last for days.

Members of Berlusconi’s centre-right PDL have threatened to walk out of Prime Minister Enrico Letta’s coalition government if a final vote – due in the Senate in October or maybe November – bars him from political life, following the upholding of his conviction for tax fraud.

One of Berlusconi’s key allies says he has already prepared a video message that could announce a decision to bring down the coalition government.

Letta’s centre-left Democratic Party (PD) and Beppe Grillo’s anti-establishment 5-Star Movement have both rejected talk of delaying the committee decision and said they would vote to expel Berlusconi if the issue gets to a full vote. Together they have enough numbers to oust him.

There is the alternative scenario that Berlusconi is not barred from political life and the PD reacts with horror. Berlusconi’s lawyers have filed documents for an appeal to the European Court of Human Rights to have the law under which he could be expelled from parliament declared invalid in his case.

On Sunday, Letta warned of the risk of fresh turmoil, saying instability comes at a cost including higher borrowing costs – too right.

In what looked like a concerted attempt to focus minds his economy minister, Fabrizio Saccomanni, said Italy risked a “totally unforgivable loss of credibility” if political turmoil disrupted efforts to cut its public deficit. Letta speaks in Brussels later in the day.

There are still good reasons to think the government will survive in some form. February’s elections show just how unpredictable Italian voters can be and the party that brings down a government tends to suffer at the subsequent polls. 
But it’s what analysts call a non-negligible risk and if it did happen, the euro zone’s summer holiday would be well and truly over.

Yes, much of the Italian austerity and reform measures are baked in but any substantial halt or U-turn could arouse the bond market’s ire in no time and the country that has been dubbed “too big to bail” could conceivably require just that.
Furthermore, the ECB says it will only intervene on any country’s behalf via its bond-buying programme if agreed government policies are in place.

If the government survives, which is still probably the safest bet, its efforts at meaningful economic reform have still been hampered by all this tumult. One option if the PDL walks out would be for the president to try and form an alternative coalition. But that won’t be easy.

Unsurprisingly, one of the features of recent weeks has been Italy’s underperformance of Spain on the bond market. Spanish premier Mariano Rajoy said on Saturday the economy would show improvement in the third quarter. Having shrunk by just 0.1 percent in the second, presumably that means a return to growth.

The Bank of France has just raised its third quarter growth forecast to 0.2 percent from 0.1.

Better for times too for British finance minister George Osborne who will use a startling turnaround by the British economy over the summer to vindicate his three-year austerity drive and slam the opposition Labour party for plotting a “disastrous” change of course.

Labour has been forced to shift strategy. Having spent two years saying Osborne was needlessly driving the economy into the ground it is now arguing that any recovery is leaving millions of people behind with living standards still falling.

Norwegians go to the polls with the centre-right opposition poised to oust the Labour-led government, promising tax cuts, privatizations and a rolling back of government. Expect firmish results around 2200 GMT. The centre-right swept to victory in Australia over the weekend. The common theme seems to be two resource-rich countries who have flourished as a result but their electorates feel surprisingly concerned or disgruntled.

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