Awave of panic has swept over the corps of foreign journalists in Italy in a rising crescendo not that dissimilar to the way the spread between Italian and German government bonds has inched progressively higher over the past year.
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And just as the spread has pushed the interest rate Italy must pay to borrow money through the seven percent barrier, what has long been considered a critical level that Italian finances cannot sustain, journalists in Italy are wondering if they are on the same inexorable downward spiral of the country they cover.
Silvio Berlusconi's imminent resignation, his „step back“ as he has preferred to call it in an apparent inability to admit defeat, has put the future of hundreds of foreign journalists into doubt. Thanks to Berlusconi, journalists have made a decent living for the past decade because his antics have guaranteed a spot for Italy on the front pages of newspapers from the United States to India, Japan and beyond.
As such, it has been hard to accept that this may be it for Berlusconi. Some things seem impossible until they happen: the U.S. pulling out of Iraq (I'll believe it when I see it), Greece winning the football European championship, an Italian at the head of the European Central Bank. Add the demise of Berlusconi to the list. It seems so unbelievable because he has had a stranglehold on Italian life since he entered politics in 1993. Even when his electoral defeat to the center-left coalition of Romano Prodi in 2006 forced him into the opposition for two years, he remained larger than life.
After it became clear this week that Berlusconi no longer had a parliamentary majority, he pledged to step down as soon as parliament had passed a law containing austerity measures demanded by the EU. The law is expected to clear both houses of parliament by this weekend and if Berlusconi keeps his pledge Italy could have a new prime minister at the beginning of next week. Italian Nobel prize winning playwright and longtime Berlusconi critic Dario Fo called the prime minister's promised resignation a „trap“, but we'll give the former cruise ship singer the benefit of the doubt and move on to planning Italy's future.
The major political parties are coalescing around Mario Monti, former EU competition commissioner, as the new prime minister. Italian President Giorgio Napolitano on Wednesday made Monti a senator for life, which opens the way for his eventual rise to the prime minister's chair even though he isn't an elected official. Monti's impeccable credentials, both as an economist and as somebody considered above the political fray, have already started to calm the markets though one has to ask, is this too little too late?
Problems with liquidity?Italy has lived something of a lost decade under Berlusconi. Since he became prime minister for a second time in June 2001, the country has managed to grow more than two percent in only one year and averaged growth of about one percent in his tenure. There is a much repeated refrain about the Italian economy that though overused rings true: when things are going well Italy grows less than other advanced economies and when things are going poorly for the world economy Italy does worse than its neighbors (the economy shrank 5.1 percent in 2008 while Germany contracted 3.5 percent). Italy's debt, 1.9 trillion euros, is more than Greece, Spain, Ireland and Portugal combined, gives credence to the phrase – too big to fail, too big to save. One of those unanswerable questions like what wins between the irresistible force and the immovable object. At about 120 percent of gross domestic product, Italy's debt is both the irresistible force that risks smashing the EU to pieces and the immovable object that just won't go away.
We now know that Greece fudged its numbers to get into the euro and though Italy didn't go to that extent, it too never should have been let in the club. The country's debt was already well over 100 percent of GDP in the mid-1990s when various European countries began scrambling to get their finances in order in time for the single currency. Though the Maastricht Treaty said the maximum debt to GDP ratio allowed was 60 percent, a clause allowed higher levels if there was a significant downward trend. There was nothing significant about the trend in Italy then or in the intervening 15 years.
The EU looked away then and is paying the price now. With France and Germany not always respecting the Maastricht criteria, they lacked the high moral ground that would have given them more leeway to whip Italy into order. Much has been made of the fact that Italy runs a primary surplus (besides debt payments the government brings in more money than it spends), a claim that can be made by only four other EU countries. This shows Italy's worst budgetary offenses are in the past and with bond prices under control it means Italy can cover its costs, but at the current dizzying rate of about seven percent the self financing part has become a major question mark.
It comes down to the question of whether Italy is about to have problems with liquidity or solvency. The former could be overcome with the help of the European Central Bank's buying of Italian bonds, a hand from the European Financial Stability Facility, and some deft management of the Italian economy by Monti and his team. But what if it is the latter, what if Italy is slowly but surely on a track to insolvency, like a train that can be slowed down, but not stopped? Sooner or later it runs off the edge of the cliff.
Italy with Monti at the helm, or anybody else save perhaps the discredited Berlusconi, will muddle through for a while, it always does. A few reforms will be passed, perhaps even some unused military buildings will be sold and the money used to pay down debt, the labour market may even be partially liberalised (don't hold your breath on this one), and maybe even the number of parliamentarians will be cut in half (Italy has a staggering 945 members of parliament, the U.S. with five times the population has 535). Then there is the promise to raise the retirement age by two years to 67 by 2026.
But it won't be enough. The Italian economy will continue to stagnate, it will continue to lose competitiveness, it will eventually reach the point of no return when it becomes clear that not only has it stagnated for 15 years, but it has no prospects looking forward.
Then it will be the way of the Greeks, a controlled default with investors forced to take a writedown on their bonds. This won't happen this year, probably not even next, but when Monti has left and the political infighting has again made obvious that Italy is incapable or reforming its economy, you will know the crack is close. Will Italy's controlled default necessarily mean the country gets kicked out of the euro or that the single currency collapses? That remains to be seen as this is uncharted territory. Italy very well may remain in the euro, in part because German exporters will not want to compete with their Italian rivals emboldened by a devalued currency.
Inability to reform.Berlusconi's inability to reform Italy's finances after almost a decade in power has made painfully obvious that the EU can't have a unified monetary policy while member countries are doing whatever they see fit with their fiscal policy. Considering the effort that went into creating the euro one can only assume that the founding fathers of the single currency took the time to consider this simple fact about monetary and fiscal policy that would be obvious to a second-year economics student. Those in charge surely figured they'd start with monetary policy and inevitably some sort of union of fiscal policy would follow. That has always been how the EU has worked, take a step that makes the next step inevitable. So far it has been successful, one only needs to think that this all started with an agreement of six countries to unify their coal and steel markets. A common fiscal policy never came and seems about as likely to arrive as the stunning rebound of the Italian economy that Berlusconi promised and never delivered. He sold himself as a free market liberal, that turned out to be far from the truth. He said he'd create an economic environment that appealed to foreign investors, that hope disappeared with his relentless attack on the judiciary and antipathy to the rule of law.
Berlusconi not so long ago made clear he eventually wanted to become president of Italy, a position of great prestige if very limited power. News of his bunga bunga parties with underage prostitutes dashed that plan, great for Italy, not so great for all the foreign journalists who make a living covering the country. And if Monti, or somebody else, doesn't pull off a miracle with the Italian economy we still just might have stuff to write that will put us on the front page for years to come.
Eric Sylvers geboren 1971 in Chico, Kalifornien (USA).
Studium an der University of California, Los Angeles (UCLA), und Johns Hopkins School of Advanced International Studies (SAIS) in Bologna.
Sylvers war zunächst Redakteur für „Bloomberg News“ in Washington, D.C. Von 1998 bis 2003 arbeitete er als Italien-Korrespondent für „Bloomberg News“.
Sylvers ist seit 2003 Italien-Korrespondent für die „New York Times“ und „International Herald Tribune“. Außerdem ist er Autor für das „Wall Street Journal Europe“.
("Die Presse", Print-Ausgabe, 13.11.2011)