EU Chiefs Tell Italy There’s No Alternative to AusterityJames G. Neuger
European Union leaders piled pressure on Italy’s rival factions to form a unity government committed to budget rigor after a deadlocked election stirred fears of an quagmire that would re-ignite the euro debt crisis.
In a message that resonated in Rome, EU President Herman Van Rompuy warned in Tallinn, Estonia, that backsliding on budget discipline and economic reforms would shatter market confidence in the 17-nation currency union’s crisis management.
“Every time we turn a corner, we must keep in mind that just around that corner lies the danger of complacency,” Van Rompuy told Estonia’s parliament yesterday. “There is no way back. And this we simply cannot afford.”
Italy’s stalemate shook European bond markets, with investors moving money from crisis-hit Spain, Portugal, Greece and Italy itself to the perceived haven of Germany. Ten-year Italian yields rose by the most in 14 months, rising 41 basis points to 4.9 percent; the risk premium against German debt jumped 51 basis points to 343 basis points.
As leaders of Italy’s two rival blocs, Democratic Party chief Pier Luigi Bersani and former Prime Minister Silvio Berlusconi, weighed their options, European officials alternated between pleading with them to craft a stable government and fretting that they won’t manage to.
Comedian-turned-politician Beppe Grillo, whose 5 Star movement was the top vote getter of any single party with his message repudiating austerity and calling for a referendum on the euro, rejected a coalition with anyone.
“This is a catastrophe for Europe,” Luxembourg Foreign Minister Jean Asselborn said in a telephone interview. “Italy won’t get out of this financial and economic crisis without a serious plan. This won’t happen with populism or by misrepresenting things. It can only work by tackling this problem in a serious manner and creating confidence again.”
Berlusconi, a three-time prime minister ousted in November 2011 during an escalation of the debt crisis, picked up a blocking minority in the upper house. The billionaire’s re-emergence and rise of Grillo risked plunging Italy into weeks of paralysis.
In an interview in Copenhagen, EU Economic and Monetary Commissioner Olli Rehn called it “important to get a functioning government in Italy.” In a statement in Berlin, German Foreign Minister Guido Westerwelle said all Europeans “are sitting in the same boat” due to the debt crisis, making political stability in Italy crucial.
Since the financial turmoil broke out in late 2009, voters in Greece, Ireland, Portugal and Spain -- the four countries tapping emergency aid -- have installed governments that hew to Germany’s budget-cutting prescriptions, though it took Greece two elections and the threat of euro expulsion to do so in 2012.
In those elections, voters bought the German argument that deficit control and the euro go hand in hand. Now the risk is that voters will equate the currency with mass unemployment.
After three years of recession and austerity, southern Europe is sitting on a social powder keg, with 2013 unemployment set to reach 11.6 percent in Italy, 17.3 percent in Portugal, 26.9 percent in Spain and 27 percent in Greece, according to European Commission forecasts on Feb. 22.
Italians broke the pattern of compliant electorates by resurrecting Berlusconi and flocking to Grillo, a political upstart who calls established leaders “failures.” It was a protest against politics-as-usual and economic distress, with voters susceptible to populist fancies and promises like the property-tax giveaway that the 76-year-old Berlusconi used to curry favor.
The principal loser, outgoing Prime Minister Mario Monti, incarnated the Brussels-to-Berlin consensus that has dominated the debt-crisis response. A 10-year veteran of the EU commission, the technocratic Monti was appointed in November 2011 to bring order to Italy’s finances after Berlusconi refused to do so.
Monti’s reward was 10.6 percent of the lower-house vote, making him the latest victim of the anti-austerity backlash sweeping Europe since an insurgent Greek movement, Alexis Tsipras’s Syriza party, arrived on the scene last year.
Monti was installed with Italy’s 10-year borrowing costs near 7.5 percent and Berlusconi, who is on trial for paying for sex with a minor and is fighting a tax-fraud conviction, discredited among his counterparts. The unelected premier imposed 20 billion euros ($26 billion) of austerity measures to cut the cost of financing the world’s third-biggest debt load.
France’s representative on the Brussels-based commission, Michel Barnier, said Italy had no choice.
“We have seen anger and popular protest and indifference, not just in Italy but elsewhere in Europe,” Barnier told Bloomberg Television in Paris. “It shows that we must talk to the people, to explain the sense of the sacrifices they are being asked to make.”
Since Greece’s brush with an unprecedented euro exit, French President Francois Hollande has emerged as the highest-profile advocate of looser budget policies, mainly as an antidote to a lethargic French economy that has lost ground in export markets to Germany.
Europe has tinkered around the edges with austerity. Deficit-reduction deadlines were extended for Greece, Spain and Portugal. The next question is the treatment of France, which the commission predicts is heading for a shortfall of 3.7 percent of gross domestic product in 2013, the sixth year above the 3 percent EU target.
A weeks-long Italian standoff and threat of new elections could leave markets on edge, posing risks for Europe’s dominant political figure, German Chancellor Angela Merkel, as she runs for a third term in September. Merkel’s main talking point is that she has kept the crisis at bay without burdening Germany with excessive bailout costs.
“If the largest peripheral country was supposed to add clarity to the EU converging process with a credible government and a reassuring pro-reform message, Italy has failed miserably,” Antonio Guglielmi, an analyst at Mediobanca SpA in London, said in a research note. “Germany has a big problem today as Italy will hardly maintain the pro-Germany stance.”