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Berlusconi’s Bravado Didn’t Save Italy From Debt Crisis or Him From Ouster

Earlier this month, Prime Minister Silvio Berlusconi told reporters what he thought of the risk to Italy’s solvency as the European debt crisis sent bond yields toward euro-area records, and who he thought should fix it.

“Restaurants are full, it is difficult to reserve a seat on a plane, resorts during holidays are fully booked,” he said at a Group of 20 meeting in Cannes, France. “We really are a strong economy. I can’t see another figure on the Italian scene capable of representing Italy on the international stage. I feel obliged to stay on.”

Four days later he offered his resignation after his parliamentary majority eroded and the country’s bond yields soared past the 7 percent mark. Berlusconi made good on that pledge on Nov. 12 after parliament passed parts of a 45.5 billion-euro ($62.6 billion) austerity package aimed at restoring investor confidence and taming financing costs.

His departure paves the way for a coalition government to be led by former European Union Commissioner Mario Monti. Berlusconi remains in parliament and could lead the People of Liberty party he founded in the next elections, which are due by April 2013.

Berlusconi’s display in Cannes partly explains his appeal to Italians, who helped turn the billionaire media mogul and former lounge singer into Italy’s longest-serving prime minister and the dominant figure in Italian politics for almost two decades.

Debt Burden

Still, his self-confidence couldn’t prevent Italy from being engulfed by the region’s debt crisis and his government from unraveling. Berlusconi’s failure to deliver on pledges to spur competitiveness in Europe’s fourth-biggest economy left the country with tepid growth and a 1.9 trillion-euro debt. That’s about 120 percent of gross domestic product, the euro region’s second-highest after Greece.

Under Berlusconi, 75, the country that produced Fiat SpA, Bulgari SpA and Benetton Group SpA became better known for the premier’s Bunga Bunga parties with young women, corruption trials and diplomatic missteps.

“A country like Italy can’t be represented by Berlusconi, who made us the laughing stock of the world,” said Santo Versace, co-chairman of fashion house Gianni Versace SpA and a member of parliament who quit Berlusconi’s coalition Sept. 29.

Sex Scandal

In addition to his failed response to contagion from the region’s two-year debt crisis, the premier is currently on trial in four different cases. Criminal accusations that he paid for sex with a 17-year-old nightclub dancer known as Ruby Heart- Stealer and then used the power of his office to cover his tracks may have done the most damage to his public support.

The publication of wiretapped phone conversations and testimony describing the parties she attended, plus details of soirees with dozens of other young women, outraged opponents and hurt Berlusconi’s standing with core supporters in a country where more than 95 percent of the population describe themselves as Catholic. His approval rating fell to a record-low 22 percent in October, less than half the level at the start of last year, according to a poll by IPR Marketing released Nov. 1.

The revelations also helped cement a rift with Gianfranco Fini, co-founder of the People of Liberty party. His break with the premier in July 2010 began the slow bleed of Berlusconi’s parliamentary majority.

Gift of the Gaffe

Berlusconi was known more outside Italy for his gaffes than for his accomplishments. After Barack Obama became the first African-American elected to the U.S. presidency, Berlusconi quipped that he admired his suntan. He told a German lawmaker he’d make a great Nazi prison guard in a forthcoming movie.

Weeks after the September 2008 bankruptcy of Lehman Brothers Holdings Inc., the premier said world leaders were planning to shut global stock markets. The Dow Jones Industrial Average fell as much as 8.1 percent that day.

Under Berlusconi, the country’s international political influence waned, yet he saw himself as front and center on the world stage. At various times he took credit for persuading U.S. leaders to bail out Wall Street, ending Russia’s 2008 war with Georgia and persuading Obama to forge an agreement with Russia on reducing nuclear arms.

“When the Republican administration didn’t lift a finger to save Lehman Brothers, this gentleman went to Washington and spent an entire day speaking with the American president,” he told the Senate in Rome on Sept. 30 this year, speaking of himself. “After that, the decision came out to make $700 billion available to ensure that the American banks didn’t collapse because otherwise there would have been a disaster.”

French-German Chuckle

Reports of Berlusconi’s sexual exploits and his regular diplomatic faux-pas helped alienate his European allies, who increasingly distanced themselves from the premier rather than standing shoulder-to-shoulder as debt woes spread and his government teetered. At an Oct. 23 summit, German Chancellor Angela Merkel and French President Nicolas Sarkozy began chuckling when asked whether they had confidence in Berlusconi.

“In England or America, people would laugh at him,” said Maurizio Viroli, professor of political theory at Princeton University and author of “The Liberty of Servants: Berlusconi’s Italy.” “They would consider him a buffoon, not a politician. Italians love appearances. They prefer actors to people who make them think.”

Public Support

Many Italians found Berlusconi, with his electric smile, permanent tan, constantly shifting hairline and incessant quips, more a game-show host than statesman. Still, he earned public support that saw get him elected three times. He governed for more than half of the past 17 years, a feat in a country that has averaged almost one government a year since World War II.

“When he was first elected and repeatedly re-elected, he was regarded as someone who had shown great business acumen which he would transfer to the broader economic stage,” said Ivor Roberts, British ambassador to Italy from 2003 to 2006 and now president of Trinity College, Oxford. “He promised to carry out much overdue market reforms to ignite the Italian economy, but he completely failed to carry them out.”

The son of a bank manager, Berlusconi learned to press the flesh early, first as a door-to-door salesman and later when he worked the crowds crooning Sinatra standards and Neapolitan love songs in Milan nightclubs and on cruise ships. Berlusconi would later make his pianist, Fedele Confalonieri, chairman of his Mediaset SpA when he entered politics.

Forbes Billionaire

After earning a law degree with a thesis on advertising, Berlusconi began dabbling in real estate on his way to building a fortune that Forbes Magazine now estimates at $7.8 billion. He developed Milano Due, a residential complex east of Milan large enough to have its own local television station.

Enamored by the medium, Berlusconi linked Milano Due with a gaggle of local broadcasters and built the country’s first private-television network. It eventually became Mediaset, the nation’s biggest private broadcaster.

For a population raised on the drab talk shows, period dramas and Vatican-backed programming of the state-owned network, Berlusconi’s mix of B-movies, American series, game shows and titillation proved a sensation. He gave Italy the “veline”: young, scantily clad women who turn up on variety shows or break the monotony of a talk show by lap-dancing a guest.

Forza Italia

By the time Italy’s political establishment imploded under the weight of the Clean Hands corruption scandals, Berlusconi was already a billionaire and a household name. In December 1993, he founded his first political party, Forza Italia, which means “Go Italy” after the chant shouted to spur on the national soccer team. The choice reflected a passion for the game that had led him to buy Serie A club AC Milan in 1986.

Berlusconi used his television stations and family-owned newspapers as the megaphone to get out his message of lower taxes, less bureaucracy and more competitiveness. Less than four months after forming Forza Italia, he was elected prime minister.

“When you introduce two elements, money and communication, it makes you unique in the political panorama,” said Carlo De Benedetti, the Compagnie Industriali Riunite chairman who had a 20-year legal battle with the premier. “What he did for Italy was very, very little.”

A Milan appeals court in July upheld a verdict that Berlusconi’s lawyer had bribed a judge to tip a 1991 takeover battle for publisher Arnoldo Mondadori SpA against CIR and in favor of Fininvest SpA, Berlusconi’s holding company. Fininvest paid CIR 560 million euros in damages.

Contract With Italians

Berlusconi’s showmanship in the early years resonated with Italians even if he failed to produce results. During his 2001 election campaign, he stole a page from U.S. Republican presidential candidate Newt Gingrich’s playbook and on national television signed a “Contract with Italians.”

It was a five-point plan that included cutting taxes, creating 1.5 million jobs, boosting pension spending and embarking on vast public-works projects. Days later he won one of the biggest majorities in postwar Italian history.

While unemployment did fall during Berlusconi’s second term, it didn’t shrink enough to meet the job-creation target. Income taxes were still stiflingly high, with the top rate at 43 percent, and his signature public-works venture -- a road link between Sicily and mainland Italy -- remains a bridge to nowhere.

Succeeding Prodi

He had pledged not to run again if he didn’t complete at least four of the points in the contract. Yet he did run for re- election in 2006, barely losing to former European Commission President Romano Prodi. He then won another landslide in April 2008 after Prodi’s nine-party coalition collapsed following two years of internal bickering.

In Berlusconi’s third term, his penchant for the models and showgirls he helped make central to Italian popular culture became a growing part of his political world. He made Mara Carfagna, a former Miss Italy contestant and topless model, his minister for equal opportunity.

He planned to have four young women with no political experience, including a winner of the “Big Brother” television show, on his ticket for European parliamentary elections in June 2009. That idea was dropped after his soon-to-be ex-wife denounced the move publicly in a tirade over Berlusconi attending the 18th birthday party of Noemi Letizia, an aspiring showgirl who called him Papi.

Berlusconi said his entreaties to young women demonstrate his commitment to equal opportunity in a nation ranked 74 of 135 countries on the World Economic Forum’s 2011 Gender Gap Index.

Financial Contagion

Berlusconi’s May 2008 victory came just as the U.S. subprime-mortgage crisis was morphing into the global financial meltdown that caused Italy’s worst recession in 60 years. The economy shrank 1.3 percent in 2008 and 5 percent in 2009 before returning to growth last year.

As the region’s debt crisis began to spread, Italy initially fared better than Greece, Ireland and Portugal, which were forced to seek 256 billion euros in bailouts. Finance Minister Giulio Tremonti, a former tax lawyer, tempered Berlusconi’s populist instincts, holding down spending and keeping the deficit under control.

Italy’s shortfall last year was 4.6 percent of GDP, about the same as Germany’s and less than that of France and the U.K. As the EU failed to contain the crisis on the other side of the Ionian Sea in Greece, Italy came under more pressure.

Berlusconi’s response to the crisis was hampered by the legal challenges against him stemming from the revelations about Ruby and the Bunga Bunga parties -- a term whose origins were unclear even as it became the global expression of the premier’s excesses.

Bunga Bunga

In his third term he spent a growing amount of time and political capital in trying to pass laws to overhaul the justice system, limit the use of wiretaps and give him immunity from prosecution. By his own reckoning, he’s faced 105 probes and trials, 2,500 court hearings and spent more than 300 million euros in legal fees since entering politics in 1994.

The prime minister has denied all the allegations against him, which range from tax fraud to bribery and engaging in prostitution with a minor. The charges are efforts by communist judges to destroy him politically, he has repeatedly said. All his efforts to gain immunity were blocked and his trials are under way; a verdict in the bribery case is possible in the coming months.

Public Tirades

Berlusconi’s public speeches generally include tirades against “red” judges. At a G-8 summit in Deauville, France, in May, he used a private conversation with a baffled Obama that was picked up on an open microphone to rail against the country’s “dictatorship of leftist judges.”

Fini, who had disbanded his national alliance party to form the People of Liberty party with Berlusconi before the 2008 elections, broke with the premier in July 2010 and took dozens of supporters with him. That left Berlusconi with a razor-thin majority that often dwindled to single digits on key votes.

One-time supporters in the business community cited the distractions of his corruption trials and his focus on self- preservation in calling on Berlusconi to resign. The message appeared in a front-page editorial on Sept. 21 in Il Sole-24 Ore, the financial newspaper owned by employers’ association Confindustria.

As his majority in parliament shrank, Berlusconi became increasingly beholden to his main coalition partner, the Northern League. The regional party, which at times has advocated succession from the rest of the country, doesn’t support Europe’s single currency.

Coalition Strain

It opposed many of Berlusconi’s efforts to cut spending, overhaul pensions and open the economy, slowing the passage of austerity measures demanded by the EU and the European Central Bank this year as Italy’s bond yields surged.

On Nov. 8, after defections by key allies, Berlusconi’s majority evaporated and he was forced to promise his resignation. It came four days after Greek Prime Minister George Papandreou said he would step down in a bid to forge a unity government, making Berlusconi the fourth southern European leader felled by the debt crisis.

Portugal’s minority government collapsed in March and Spanish Prime Minister Jose Luis Rodriguez Zapatero called elections four months early after deciding not to run again. Polls show the People’s Party is set to oust his governing Socialists on Nov. 20.

It may be premature to declare an end to Berlusconi’s political career. Italian elections must be held by April 2013 and Berlusconi may be the only figure who can hold his party and its alliance with the Northern League together.

Political Future

In a nationally televised speech yesterday, Berlusconi said his resignation as prime minister should not be taken as an indication he’s leaving politics.

“For those who say I am leaving the scene, I want to make it perfectly clear that tomorrow I will re-double my efforts in parliament to renew Italy,” he said. “I won’t give up until we have managed to modernize Italy, to reform its instructional architecture, its justice system, its tax system.”

It’s too soon to discuss Berlusconi’s legacy, said Bill Emmott, the author of “Courage, Italy: How to Start Again after Berlusconi” and the editor of The Economist magazine when it declared Berlusconi “Unfit to Lead Italy” on a 2003 cover.

“A legacy is something you talk about when people die or when people definitively leave the political scene,” Emmott said in an interview. “I would not conclude that he has definitively left the political scene.”

To contact the reporter on this story: Andrew Davis in Rome at abdavis@bloomberg.net

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net

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