Prime Minister Silvio Berlusconi’s offer to resign leaves Italy struggling to produce a new regime stable enough to implement painful austerity measures in a country that has averaged almost a government a year since World War II.
Berlusconi said today that he favored early elections and that Angelino Alfano, head of his People of Liberty party, might be the candidate. Berlusconi last night said he’d step down as soon as parliament passed cost-cutting steps pledged to European Union allies in a bid to convince investors Italy can curb record borrowing costs. Parliament is due to vote on the measures in the coming weeks.
Italian stocks and bonds fell today on concern that a change in leadership won’t be enough to contain the turmoil in a nation with the euro-region’s second-biggest debt. European officials’ inability to tackle the sovereign crisis led to a surge in Italian bond yields in recent weeks that further frayed Berlusconi’s fractious coalition as top ministers bickered over how to protect the country from the contagion.
“Whoever is in charge, the numbers remain the same and this morning they are even worse,” Simon Smith, chief economist at foreign-exchange broker FXPro Group Ltd., said in a research note. “This Roman road is currently leading to a cliff. Events have moved far faster than the labored political process of the EU can deal with.”
The yield on Italy’s 10-year bond surged 70 basis points to 7.47 percent as of 11:51 a.m. in London, and the five-year yield reached 7.7 percent; those levels drove Greece, Ireland and Portugal to seek international bailouts. LCH Clearnet SA, the French arm of Europe’s largest clearing house, said yesterday it would increase the extra deposit it demands from clients to trade all Italian government bonds and index-linked securities.
Credit-default swaps on Italy’s government bonds jumped 12 basis points to a record 536, according to CMA prices, while the euro dropped 1.4 percent. Italy’s FTSE MIB fell 4 percent and futures on the S&P 500 lost 2.5 percent. Contracts on the Dow Jones Industrial Average fell 1.9 percent.
Berlusconi’s pledge to resign came after he failed to muster an absolute majority on a routine parliamentary ballot, obtaining only 308 votes in the 630-seat Chamber of Deputies yesterday, after key lawmakers defected from his party this week to join the opposition.
“Italy is now in a dance of death,” Fredrik Erixon, head of the European Centre for International Political Economy in Brussels, said in a telephone interview. “What we need is a strong reaction from other euro-zone leaders to calm markets. But we don’t have it.”
The EU stepped up pressure on Italy to deliver its debt-reduction measures even as Berlusconi’s government was unraveling. Italy’s 1.9 trillion euro-debt ($2.6 trillion) is bigger than that of Greece, Spain, Portugal and Ireland combined.
“The economic and financial situation in Italy is very worrying,” EU Economic and Monetary Commissioner Olli Rehn told reporters yesterday after a meeting of euro-area finance ministers in Brussels. Rehn said he sent Finance Minister Giulio Tremonti about 40 “very specific questions” on Italy’s economic pledges and expects answers by the end of the week.
Once parliament passes the plan to implement the austerity measures and Berlusconi resigns, President Giorgio Napolitano will consult political leaders to see if there is to form another government with a broader majority.
Napolitano could also try to build support for a so-called technical government led by a prominent non-politician charged with implementing the economic overhaul and eventually preparing new elections. Former EU Competition Commissioner Mario Monti would be a candidate to lead such a government, Nomura International economist Lavinia Santovetti wrote in a note on Nov. 7.
Berlusconi and his allies insist that Italian voters and not political leaders should choose the next government. “I don’t think there are other feasible solutions,” Berlusconi told state-run RAI television last night. “It’s unfathomable that those who lost the elections can govern.”
Elections could further delay Italy implementing the measures pledged to the EU that also helped convince the European Central Bank to backstop its debt. The ECB has spent more than 100 billion euros on sovereign debt since starting its purchase of Italian and Spanish bonds on Aug. 8.
By law, elections must be held between 45 days and 75 days after the president has dissolved Parliament and the act has been published in the government’s Official Gazette.
Most of the opposition parties have signaled they would support a broader coalition or a technical government in a country where election rules and party politics often produce unstable governments that rarely endure a full five-year term, even in the best of times. Any new government not chosen through elections would serve out the current legislative term until April 2013.
Berlusconi, 75, is Italy’s longest-serving prime minister, and has won three elections, governing for half the 17 years since he entered politics in 1994. His resignation doesn’t necessarily signal the end of his political career. He could lead his party in new elections, or run again in 2013.
Italy does have a track record of reaching outside the political spectrum for leaders of technical government, who are generally given a limited term and charged with carrying out specific reforms. Bank of Italy Governor Carlo Azeglio Ciampi was called in to run a technical government in 1993 that oversaw a broad labor market agreement between employers and unions. Treasury Minister Lamberto Dini pushed through a sweeping pension reform as head of another technical government starting in 1994.
Before Berlusconi resigns and Napolitano begins the consultations, both houses of parliament must approve the budget plan. The bill includes an amendment that codifies the implementation of the government’s 45.5 billion-euro austerity plan first announced in August and subsequent measures to trim debt and spur growth in an economy that has trailed the European average for more than a decade.
Berlusconi’s Cabinet agreed to attach some of Italy’s promised austerity and growth measures as an amendment to an existing spending bill. The amendment will include a plan to accelerate asset sales of as much as 60 billion euros, liberalize closed professions and local services and boost infrastructure investment, newspapers including Il Sole reported on Nov. 3.
“The key political point for Italy is now answering the following question: which government, with what wide majority, will be able to implement in a few days the structural reforms that we haven’t been able to implement in the last 10 years?” Mario Baldassarri, chairman of the Senate Finance Committee, said in an interview yesterday.