The Italian Job: Elections, the Euro, and Silvio Berlusconi

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    Dec 12, 2012

    In a surprise move, technocrat Mario Monti, the Italian prime minister, submitted his resignation over the weekend following the decision by the center-right People of Liberty (PDL) party to withdraw from the government coalition. This decision came about after Italian economic minister Corrado Passera told a TV interviewer that “a return to the past would not be good for Italy,” referring to the policies of former prime minister and PDL leader Silvio Berlusconi. Markets and European political leaders reacted immediately to the news, fueling speculation about what impact the elections may have on the Italian and euro zone economies. Although the 12-month-old technocratic Italian government would have come to an end next April, the PDL’s move and the political reemergence of Silvio Berlusconi raise questions about the future of Italy’s economic and political reforms and its potential contagion effect on Europe’s most fragile economies, particularly Spain.

    Q1: Why did Prime Minister Mario Monti’s government collapse?

    A1: A technocratic government—no matter how desirable from the standpoint of Brussels and international lenders—is only as strong as its existing domestic political support, and that support had begun to wane. For the past several months, the policies imposed by Prime Minister Monti, a combination of austerity and higher taxes, have grown understandably unpopular as economic growth is forecast to contract in Italy by 2.2 percent in 2012. In anticipation of the upcoming election season, mainstream Italian political parties had already begun to shy away from or water down significant reform measures.

    Italy’s political spectrum has begun to prepare itself for these important elections. The Italian center-left party recently selected its new leader, Pier Luigi Bersani, to run as the candidate of the Democratic Left in the upcoming elections. The Italian center-right parties, on the other hand, have been in disarray for months. Without a charismatic successor to maintain party unity, following former prime minister Berlusconi’s political departure in November 2011, and further weakened by corruption, scandals, and in-fighting involving various PDL partners, the center-right’s popularity and political dominance were rapidly fading.

    Sensing a shifting populist mood against further reform and austerity introduced by Monti and, a leaderless right, Berlusconi and his PDL party seized the moment and began to attack Monti for plunging the country into a “spiral of recession” and for imposing on average Italians “German-centric” policies. While Berlusconi may have seized the political moment, Monti countered with a tactical surprise by the speed of his resignation, leaving Berlusconi scrambling to reunite the fractured right and put forward a convincing political platform.

    Unfortunately, the immediate victim of the resignation is the reform process and measures that are in the political pipeline, such as a constitutional amendment to enforce a balanced budget by 2014 and bills that would cut a number of provincial authorities, simplify the tax code, promote a broad package of pro-growth measures, and put forth a plan to save Europe’s largest steel plant, located in southern Italy.

    Q2: How do early elections impact the Italian economy and the European sovereign debt crisis? What is at stake?

    A2: Despite the initial surprise of Monti’s announcement, the market, while jittery, seems to be taking the news in stride, recognizing that the decision only brought forward national elections six weeks earlier than originally planned. Markets and European officials were also fully aware of the slowdown of Italian reform measures but were hopeful that Monti could wring out enough political momentum to push through a few more difficult reforms before the election. The big question markets and international investors will focus on is the likely composition of the next government and whether or not it will change policy course and nullify the reforms Monti’s government set in motion.

    Monti’s brief one-year tenure initiated a series of meaningful economic reforms that, when coupled with the European Central Bank (ECB) decision in July to “use all means available” to mitigate soaring European borrowing costs, had a rejuvenating effect on the world’s second-largest debt market. When he came into office, Prime Minister Monti faced record high borrowing costs on 10-year Italians bonds—the benchmark for investor confidence—of 7.48 percent. Last week, 10-year Italian bonds were trading below 4.4 percent, the lowest rate in two years and only three months after the Italian government had contemplated applying for an emergency bond-buying program from the ECB. That will be Monti’s positive legacy.

    Unfortunately, Italy’s current economic situation is a negative legacy, as the economy is set to contract by 2.2 percent by year’s end, unemployment is 11.1 percent, and Italy has a 126 percent debt-to-GDP ratio. This ongoing economic malaise will be the political focus of Berlusconi in the coming weeks.

    Q3: What are the likely scenarios of a future Italian government?

    A3: There are five key figures to watch in the upcoming elections: center-left Democrat candidate Pier Luigi Bersani; Beppe Grillo, a comedian, political satirist, and populist who leads the Five-Star Movement; Silvio Berlusconi, who would like to win his fourth term as prime minister; Mario Monti, if he decides to join with centrist parties and seek the office; and, finally, the market.

    Opinion polls currently place Pier Luigi Bersani and his center-left Democrats well ahead of his challengers with roughly 30 percent of the vote. Despite this advantage, a Bersani victory is not guaranteed as the party has been plagued by internal rifts between the next generation of young Italian politicians and the political establishment. Bersani is considered a moderate and has made it clear that he plans to stick to Monti’s economic commitments. However, he will be under growing pressure by Italy’s powerful unions to undo some of Monti’s reforms.

    Comedian Beppe Grillo, often branded as Italy’s version of Stephen Colbert, has led his Five-Star Movement to second place in the polls with roughly 20 percent support. The antiestablishment movement is composed mostly of youth who are completely turned off by Italy’s traditional parties, politics, and ongoing scandals. The party leans left and is fiercely euroskeptic. It is yet to be determined if the party can sustain support at the national level, but given its strong performance in Sicily’s regional elections (where it won more votes in the regional assembly than any other single party) and the return of Silvio Berlusconi as a potent reminder of Italy’s political status, Grillo will be an unpredictable force with the power to influence the election outcome and the government’s formation.

    For Silvio Berlusconi, gone are the days of 37 percent popularity. His party is currently polling at roughly 15 percent. While Berlusconi’s chances of claiming a fourth term as prime minister are slim, he and his collection of center-right parties may end up being a king (or shall we say prime minister) maker by supporting one candidate over another to form a government. His campaign is expected to promote an anti-austerity platform by proposing tax cuts and putting an end to German austerity. Berlusconi’s political return may have the added benefit of providing immunity from his ongoing legal problems after being convicted of tax fraud in October and with an upcoming judgment on whether he consorted with an underage prostitute.

    The wild card scenario would see Monti reelected as prime minister under the patronage of a centrist coalition. Reports have indicated that Monti is being heavily courted by several centrist groups, including the Catholic UDC party, and by Luca Cordero di Montezemolo, the head of Ferrari, who recently launched a political movement in support of Monti. A formal decision on Monti’s political future is expected in the coming weeks.

    The final figure in the upcoming election that does not have a vote but could ultimately sway the election is the market. Should the market believe that Italy will not continue down its current reform path, borrowing costs could increase and banks could tighten credit, further exacerbating economic contraction. There would be a contagion effect on the already fragile economies of Spain, Portugal, and other peripheral economies. Should the market react negatively, Italian voters may support political figures that will restore calm to the markets, such as Mario Monti.

    As Gordon Bajnai, former Hungarian prime minister and CSIS senior adviser, recently said at CSIS, “Highly indebted European governments are like Henry Ford selling the Model-T: You can have any color you like, as long as it is black.” Meaning, you can have any government you would like in Rome, as long as it follows through on its reforms.

    Heather A. Conley is senior fellow and director of the Europe Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Matthew Melino is research assistant and program coordinator with the CSIS Europe Program.

    Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

    © 2012 by the Center for Strategic and International Studies. All rights reserved.


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Heather A. Conley