Commentary: Berlusconi Is Part of the Problems He Must Fix

By Gail Edmondson

Media magnate Silvio Berlusconi, the victorious head of Italy's new center-right government, wielded a showman's talent throughout his 10-month campaign, sending 18 million copies of a self-published glossy magazine that aggrandized his life story. He also proclaimed himself "the best leader in the world." But Italy's richest man won't be able to sustain his popularity on mere media glitz. Economists give the country two years at most before a serious decline in competitiveness becomes endemic. To turn Italy around, the former cruise-ship singer with the perpetual suntan will have to defy the odds.

Berlusconi aims to move fast. Finance Minister-designate Giulio Tremonti spent the campaign drafting laws for a rapid-action plan during the first 100 days in office, including the introduction of more flexible labor contracts and tax breaks for the reinvestment of profits. Tremonti, a highly regarded tax lawyer and economics professor, says the new government aims to cut individual taxes by $30 billion, reduce the number of individual tax brackets from five to two, and bring down the top corporate rate to 33% from the current range of 40% to 70%.

Cutting taxes is just the beginning. Berlusconi and Tremonti also plan to overhaul inefficient public institutions, slash red tape, cut taxes on venture capital profits, and coax the underground economy into the light with a partial break on social security taxes. Invisible companies that are lured into operating legally could produce as much as $12 billion a year in fresh tax revenues starting in 2002, Tremonti argues, which will help fund tax cuts. He's even promised to tackle pension reform.

It's a dream agenda for Italian entrepreneurs, who have long suffered neglect at the hands of ineffective and short-lived governments. But the new administration has little room to maneuver. Italy needs strong growth to reverse its decline. The levels of investment needed in everything from research and development to education and infrastructure already far exceed the country's reserves. That's before lumping in the estimated $35 billion price tag for those hefty tax cuts.

Berlusconi's character could be a problem, too. Given his autocratic personality, intolerance of criticism, and questionable ethical judgment, doubts about his ability to modernize Italy loom large. Add to that his legal problems: Since 1994, magistrates have investigated the 64-year-old businessman on allegations of money laundering, tax evasion, and bribery. Berlusconi fiercely denies the charges and insists he is the victim of left-leaning prosecutors.

Berlusconi's clear conflict of interest as owner of a media empire will also undercut his effectiveness and moral authority. He owns three of Italy's six television stations; as incoming Prime Minister, Berlusconi now controls the three state-run RAI stations, too. "I'm concerned about freedom of the press," says Franco Modigliani, a Nobel-prize winning Italian economist and a professor at Massachusetts Institute of Technology. If Berlusconi is serious about modernizing Italy, the most breathtaking change he could make would be to sell his media interests to a true independent.

Berlusconi may dream of remaking Italy for the 21st century. But to do that he needs vision, moral leadership, and the skills of a consensus-building politician. Italy has long operated with one foot outside the realm of a normal democracy. Berlusconi may have, too. In the future, the cost of that behavior could be Italy's very prosperity. Berlusconi needs to do more than cut taxes. He must vastly improve Italy's democratic institutions, enhance real competition in markets, and encourage freedom of the press. Yet as candidate for the country's highest office and defendant in multiple lawsuits, Berlusconi recently vowed to subjugate prosecutors to executive control. Basta, Mr. Berlusconi. Italy deserves better.

Edmondson covers Italian politics and economics from Rome.

    Before it's here, it's on the Bloomberg Terminal.