Berlusconi's Return Has Europe Back in Crisis Mode

Italy’s former prime minister Silvio Berlusconi arrives at the training ground of the AC Milan football team, which he owns, in Milanello Photograph by Giuseppe Cacace/AFP via Getty Images

Silvio, no! The message from investors couldn’t have been clearer. Italian stocks and bonds plunged on Dec. 10, and the euro currency neared a two-week low against the dollar, on news that Prime Minister Mario Monti would step aside after his predecessor, Silvio Berlusconi, withdrew support for Monti’s government.

Monti’s decision could lead to elections as early as February, with Berlusconi as a candidate. The vote would likely be preceded by a vigorous campaign by the former prime minister against the austerity and economic-reform measures Monti’s technocratic government has championed. “Italian political stability has been jeopardized once again,” says Giada Giani, an analyst with Citigroup Global Markets in London.

A greater fear is that political turmoil in Italy could open a new front in the battle to contain the euro crisis. “Italy can’t stall at two-thirds of the reform process,” German Foreign Minister Guido Westerwelle told Der Spiegel on Dec. 10. “That wouldn’t cause turbulence for just Italy, but also for Europe.”

“The ability of Silvio Berlusconi to spook investors knows no bounds,” says Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. “He epitomizes the dysfunctional nature of Italian politics, with its discredited leaders and unstable governments.”

Sounds scary—but could the flamboyant 76-year-old Berlusconi really cause that much trouble? For one thing, he still has legal troubles, including a pending indictment for tax fraud. And his People of Liberty party is drooping in the polls, with a Dec. 7 survey showing it with only 13.8 percent support. The party with the greatest popular support, roughly 30 percent to 38 percent in recent polls, is the center-left Democratic Party. It has backed Monti, who was appointed last year when Berlusconi stepped down after being indicted.

There’s no immediate risk that Berlusconi or other critics will scrap Monti’s accomplishments, including cuts in government spending and reforms to labor laws and pension programs. “Almost all of the Monti agenda has been passed already,” says Citigroup’s Giani.

Monti hasn’t ruled out the possibility that he’ll be a candidate himself. “I don’t know, I just don’t know,” he told the newspaper La Repubblica over the weekend when asked if he might run.

He could be a strong candidate. “With public support for his policies at around 47 percent, Monti carries considerable power going into the election, should he choose to use it,” Erik Nielsen, global chief economist for UniCredit Research, wrote in a Dec. 9 research note. Another possible scenario is that the Democratic Party would win, with its leader Pier Luigi Bersani becoming prime minister and Monti becoming president.

While it seems unlikely that Berlusconi would win outright, his anti-austerity, anti-euro rhetoric could heighten discontent among recession-weary Italians. Unemployment is at 11.1 percent, a 13-year high, and the national statistics office reported on Dec. 10 that the economy shrank for a fifth consecutive quarter.

Even if Berlusconi fades, political tension in Italy and in other troubled euro zone economies is likely to rise, says Fredrik Erixon, director of the European Center for International Political Economy in Brussels. Despite public protests in recent months, governments in troubled European economies haven’t seen their power seriously threatened. That period of relative calm could end soon, Erixon warns. “The unique character of the euro zone crisis has been one of absence of political authority,” he says. “We’re getting to a point in the cycle where a minor slippage here or there can trigger something bigger.”

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