Crumbling Coalition? Berlusconi's Government Wobbles in Face of EU Pressure

The European Union has demanded that Italy finally do something about its massive debt problems. But Berlin, Paris and the markets are losing faith in Prime Minister Berlusconi's ability to do so. And a major coalition partner, the Northern League, has indicated that new elections are a possibility.
Many have begun to doubt whether Italian Prime Minister Silvio Berlusconi can get his country's debt problems under control.

Many have begun to doubt whether Italian Prime Minister Silvio Berlusconi can get his country's debt problems under control.

Foto: AFP

The marathon of European Union meetings in recent days  has made one thing abundantly clear to the Italians: Their country's leadership is no longer taken seriously. Worse still, the government of Prime Minister Silvio Berlusconi has become cause for bemusement for German Chancellor Angela Merkel and French President Nicolas Sarkozy.

Indeed, Italian dailies on Monday were full of observations about Merkel's "condescending smile" and Sarkozy's pointed comments when discussing Rome's debt situation during a Sunday press conference in Brussels. Internet videos of the two rolling their eyes and smiling at one another made the rounds as well.

It is "insulting to be equated with Greece," wrote the Italian daily La Stampa. "We are the sick man of Europe because our government is incapable of action and has been unable to introduce reforms or measures to promote growth."

Concretely, the Italian reactions were directed at demands that Rome finally assemble a convincing package of measures aimed at reducing the country's exorbitant pile of sovereign debt . During a "talk among friends," as Merkel called it, Berlusconi was told to present a plan by Wednesday for reducing Italian debt more quickly than current plans call for. Berlusconi, said European Council President Herman Van Rompuy afterwards, promised to do so.

Berlusconi Strikes Back

On Monday evening, the Italian head of government was striking a distinctly different tone. "No one is in a position to be giving lessons to their partners," Berlusconi said, insisting that his country had made moves to improve its public finances and that Rome would have a balanced budget by 2013. He also said that his country's economy was stable enough that "no one need fear Europe's third-largest economy."

There are plenty who would disagree. Rome is sitting on €1.8 trillion in debt, well over 100 percent of the country's annual economic output. And while its budget deficit remains much lower than in other troubled euro-zone member states, the country's lack of alacrity when it comes to paying down its debt has not impressed the financial markets. Indeed, Standard & Poor's downgraded Italian debt in September.

Furthermore, Berlusconi has proven uninterested in fulfilling his own promises. Even his pledge to balance the budget within the next two years seems shaky. While Rome passed a €54 billion austerity plan over the summer -- one which it promised would drastically reduce the need for taking on new debt -- few of the measures called for in the plan have been implemented. Even European Commissioner for Economic and Monetary Affairs Olli Rehn said on Sunday that details on the plan were "unclear."

Similarly, efforts aimed at raising the retirement age to 67 -- a measure Germany implemented years ago -- have gone nowhere. A cabinet meeting to discuss the issue on Monday evening made little progress and it has become increasingly clear that Berlusconi's governing coalition could collapse if he pushes too hard. A key partner, the Northern League, has said it will not support the measure, a position the party's parliamentary floor leader Marco Reguzzoni reiterated on Monday.

On Tuesday, Northern League head Umberto Bossi went even further, saying that no additional meetings on the retirement age are currently scheduled. New elections, he indicated, could be a possible alternative.

A Few Billion More

That Merkel and Sarkozy are now pushing hard for Berlusconi to finally take his country's economic situation seriously has everything to do with the current EU summit marathon in Brussels. High on the agenda are measures  aimed at increasing the impact  of the €440 billion euro backstop fund. After all, should a country like Spain or Italy -- or even France  -- develop a need for outside assistance, the fund as currently constituted would not be sufficient. The EU hopes that leveraging the fund to €1 trillion -- the total mentioned in Monday reports -- will impress financial markets as to the EU's dedication to saving the euro . A clear Italian commitment to austerity is a key component of that plan.

In Italy, there are plenty of ideas floating around as to how the state could generate some extra cash to begin paying down its debt. Up to €6 billion, it is said, could be generated via the sale of forestland and meadowland. Furthermore, Rome could put together an amnesty deal with tax evaders to generate a few billion more.

Such measures, however, are not lasting sources of revenue. And they wouldn't even be a drop in the bucket. Many experts, including Italy's employer association, have demanded deep reforms. So far, however, most proposals have experienced the same fate as the effort to raise the retirement age. They either fail due to the fragile nature of Berlusconi's coalition or the prime minister -- as happened with a wealth tax proposal -- blocks them himself.

Rising Risk Premiums

That combined with Berlusconi's ongoing legal troubles -- he is the object of four ongoing trials at the moment -- have led many to wonder whether his departure might be necessary before Italy can begin to make serious progress toward reform. According to a report in the Italian daily Corriere della Serra, Merkel called Italian President Giorgio Napolitano last week to discuss concerns about Italy's political leadership.

And she's not the only one. Financial markets too are nervous. In August, the European Central Bank was forced to buy up Italian bonds after a wave of concern about Italian finances resulted in vastly increased risk premiums on those bonds. This week, yields on 10-year Italian bonds are nearing 6 percent -- almost as high as they were in August.

With reporting by Hans-Jürgen Schlamp

cgh -- with wire reports