Italy: Berlusconi May Have Ruined His Best Chance For Change

When Silvio Berlusconi patched together an unwieldy center-right alliance to battle Italy's left wing in national elections last March, he was cheered on by much of the country's business community. After all, they reasoned, if he could put together a $7.5 billion media empire in just 15 years, then he should be just the man to streamline Europe's most statist and bureaucratic economy. The population, battered by two years of recession and political crisis, also bought into his pro-growth promises.

But two months after the former media tycoon took office as Prime Minister, Italians' hopes for a fruitful period of political stability are fading fast. Berlusconi has proven inept from the beginning, and now his fragile coalition of neo-Fascists, Northern League regionalists, and his Forza Italia party is badly fraying. Many analysts think he has squandered his chances for the drastic budget-cutting, privatization, and deregulation that were to be the heart of his program for revitalizing the country. "The government has been a total disappointment," says Gianluca Sabbadini, a fund manager at Switzerland's Banca Arner, who is telling clients to dump Italian securities.

As some predicted, Berlusconi is finding that the extensive business interests that helped him score his surprise election win in March hobble his ability to govern. He first got into trouble just after taking office in May, when criticism and interference from his government provoked the resignation of the entire board of directors of Italy's state-owned broadcaster RAI. This episode drew charges that Berlusconi was trying to wreck RAI to benefit his Milan-based Fininvest media juggernaut, which dominates Italian commercial broadcasting. Berlusconi is also drawing flak for trying to influence key appointments at the fiercely independent Bank of Italy.

JAILBREAK. But it was in mid-July that Berlusconi took his biggest pratfall. With millions of Italians distracted by the World Cup, Berlusconi's Cabinet hastily pushed through decrees to abolish preventive detention for the thousands of politicians and executives charged with corruption. As a result, 1,859 prisoners walked, although only about 10% of them were in jail on corruption charges.

The seemingly blatant attempt to curb Italy's hugely popular anticorruption campaign produced a national outcry. There were charges that he was trying to protect cronies, including several Fininvest executives who are under investigation. The much admired investigating magistrates threatened to resign en masse, and the Northern League threatened to desert the coalition. With his government in danger of falling, an angry and humiliated Berlusconi was forced to back away from the measures on July 19.

This debacle badly damaged Berlusconi, who now may be vulnerable to further attacks on his business ties. All this spells trouble for his economic program. The architect of those measures, Treasury Minister Lamberto Dini, conceded as much in an interview with BUSINESS WEEK. Dini wants $20 billion in spending cuts for next year alone, largely through hacking away at lavish health-care and pension programs. "But it won't be easy" for the government to win approval, he says. The cuts are necessary to curb the runaway deficits that have plagued the country's finances.

Dini, a conservative former director general of the Bank of Italy, remains hopeful of achieving significant reform. "Berlusconi by now appreciates the fact that while some of these measures may be unpopular," he says, "the cost of doing nothing for six months or a year will be even greater." But the fact is that the unsettled political climate in Rome, as well as a recent wave of strikes that hit everything from Alitalia

to Sardinian coal mines, means the new plan is likely to be vastly watered down when Parliament votes on it by mid-September. Investors already are queasy. The Italian lira is at record lows against the German mark, and Italian bonds are way down.

Disagreements among Berlusconi's coalition partners also seem likely to curb another big component of his

economic plan: privatization. Dini wants to sell off such state companies as $19 billion telecommunications giant STET and electric utility ENEL. But far-right elements of the government want strict limits put on foreign investments in strategic areas, such as telecommunications. That could slow down the sell-offs.

But Berlusconi is not dead yet. A run of good luck might allow him to recover strength. He's getting help from an economy that is looking surprisingly buoyant after its worst postwar recession. Industrial production will likely be up 7.5% this year. Money in people's pockets could make cuts easier to swallow. Despite the squabbling, coalition partners will be reluctant to break up the show and bring on new elections, as such a move could backfire. Still, many Italians are starting to get the sinking feeling that the new Italy ushered in with such fanfare just two months ago is looking a lot like the old one.

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