The Economist has a great elegy for my favorite
soon-to-be now deposed leader, Silvio Berlusconi. If you gave me a list at the beginning of the year of Hosni Mubarak, Moammar Gadhafi and Berlusconi, I would have said that Berlusconi would have been the hardest one to dislodge from power. It took him almost destroying his country with his governance – for the second time – to finally bring the hammer down.
Mr Berlusconi has governed it for eight and a half of the past ten years, and has probably done more to mould it in his image than anyone since the country’s fascist dictator, Benito Mussolini. For the past 30 months he has clung to power with improbable tenacity, shrugging off scandals that would have felled the leader of almost any other country [...]
Alarm was also spread by Mr Berlusconi’s initial insistence on a general election as the only way out of the political deadlock, and by his naming of a perceived stooge, Angelino Alfano, the secretary of his People of Freedom (PdL) movement, as his likely successor: the man who, as justice minister, introduced a 2008 law, later ruled unconstitutional, that provided Mr Berlusconi with immunity from prosecution. Not even an agreement by parliamentary business managers to pass the economic reforms by November 14th stemmed the run on Italian debt.
This is Berlusconi’s legacy. Parliament under his rule served mainly to extricate him from any of a number of extra-curricular legal problems, when it wasn’t designing policies almost entirely for the benefit of his businesses. Anyone who thinks that Berlusconi will spend a minute in jail hasn’t been paying attention to how he has run the political sphere for the past two decades, quietly reducing his own exposure to prosecution.
The Prime Minister ran the country into the ground, and even under the circumstances, his exit is welcome news. Berlusconi’s unflagging optimism actually bordered on dementia: his response to the current bond crisis, initially, was that the restaurants were full, so the economy must be doing fine. The country is a mismanaged wreck, where powerful monopolies hold the vast majority of wealth, poverty rises, and protection rackets are the norm. It can be said that, at least when the entire government was under the sway of the mafia, the trains ran on time. This Berlusconi/Mafia hybrid – his ties are well-documented – was just inefficient. Growth over the past 15 years has averaged a paltry 0.75% (of course, this doesn’t take into account a very large black market economy).
None of this is to say that the alternative will be sunny for Italy in the near term. They are being forced into crushing austerity, which will not work in providing economic growth. Spending cuts will merely lead to revenue reductions. There is not nearly enough time to just wait around for growth when bond yields are elevated. Things may not be able to get worse, but yet it can.
And this is premised on the notion that Berlusconi still won’t be wielding influence behind the scenes. In this reading he goes back from being Prime Minister to just being Rupert Murdoch, in control of most of the media Italians see. He can hide there in the shadows before coming back to life, like he did after the reign of Romano Prodi, and returning to power.
More broadly, the only way Italy has out of their own troubles is the European Central Bank, which is completely unwilling to act as the lender of last resort to avoid an outright depression. Paul Krugman has the best word on this:
What has happened, it turns out, is that by going on the euro, Spain and Italy in effect reduced themselves to the status of third-world countries that have to borrow in someone else’s currency, with all the loss of flexibility that implies. In particular, since euro-area countries can’t print money even in an emergency, they’re subject to funding disruptions in a way that nations that kept their own currencies aren’t — and the result is what you see right now. America, which borrows in dollars, doesn’t have that problem.
The other thing you need to know is that in the face of the current crisis, austerity has been a failure everywhere it has been tried: no country with significant debts has managed to slash its way back into the good graces of the financial markets. For example, Ireland is the good boy of Europe, having responded to its debt problems with savage austerity that has driven its unemployment rate to 14 percent. Yet the interest rate on Irish bonds is still above 8 percent — worse than Italy.
The moral of the story, then, is to beware of ideologues who are trying to hijack the European crisis on behalf of their agendas. If we listen to those ideologues, all we’ll end up doing is making our own problems — which are different from Europe’s, but arguably just as severe — even worse.