The Greek and Italian prime ministers were both under heavy pressure to resign on Thursday. The focus of Europe’s sovereign debt crisis has shifted to their countries with the perception lingering that they won’t be able to rein in public spending sufficiently in the short term to stave off a default.
After eurozone leaders agreed to expand the temporary European bailout fund at a summit last week and forgive 50 percent of Greek debt, Prime Minister George Papandreou called for a referendum on the rescue package to the dismay of other euro nations.
German chancellor Angela Merkel and French president Nicolas Sarkozy tried to convince Papandreou to scrap plans for a vote ahead of a G20 meeting in Cannes. Lawmakers in Athens made similar demands where there was speculation that Papandreou might resign. Read more “Greek, Italian Leaders Under Pressure to Go”
The ruling coalition in Italy is divided over the need to implement further budget cuts. Whereas Prime Minister Silvio Berlusconi promised to deliver additional austerity measures this weekend to stave off the specter of Europe’s debt crisis reaching Italy’s shores, his partners in the separatist Lega Nord are critical.
Other European leaders pressed Berlusconi at a Brussels summit on Sunday. They fear that unless Italy shores up its public finances, the continent’s spiraling debt crisis could drag the eurozone’s third largest economy down with it and imperil the future of the entire currency union. Read more “Italian Government Divided Over Budget Cuts”
The Italian cabinet reneged on a promise to implement €5 billion worth of austerity measures this week in a move that is likely to trigger further market contention and meet the disapproval of other European Union member states.
Prime Minister Silvio Berlusconi agreed to cancel a proposed wealth tax as well as cuts in local government funding under pressure from members of his own coalition in the Lega Nord party, a separatist movement that is powerful in the industrious north of Italy.
The Berlusconi government had previously planned up to €48 billion in spending reductions with most cuts postponed until after the parliamentary elections of 2013. It promised to accelerate some of those plans and cut billions more between now and election year but that aim seems in jeopardy.
Europe’s central bank president Jean-Claude Trichet urged Italy on Saturday to agree to a deficit reduction package soon. “It is essential that the target that was announced to diminish the deficit will be fully confirmed and implemented,” he stressed.
The ECB spent €41.6 billion buying Italian and Spanish debt last month. Italy’s foreign minister said that his government would urge the bank to continue the bond purchase operation — something Trichet and his fiscal hawks are wary of.
The Italian treasury will be put to further test this September when €60 billion in redemptions come due.
Italy’s national debt amounts to more than 120 percent of its economy and is one of the largest among developed nations. Only Greece and Japan are more heavily indebted.
The third largest economy in the eurozone, Italy is far less competitive than Germany and other countries in the north. Cronyism, corruption and rigid labor laws constitute major impediments to growth. The judiciary is more political than is the case in most of the rest of Europe, forcing companies to often settle out of court while the prevalence of bribery and organized crime perpetuates a traditional imbalance between the industrialized north and the largely agricultural south of the country. Especially in the south, a high amount of economic activity is confined to the informal sector.
Due to its sheer size, its conservative banking industry and high level of personal savings, Italy should be able to stave off the specter of default but if there is a crisis of confidence, the country’s seemingly unstable political constellation can only deepen and prolong it.
The ruling party is beleaguered by corruption and scandals and may have to cope with a leadership vacuum if Berlusconi fails to stand for reelection two years from now. The leftist opposition, formally united in a single party since 2007, is easily scattered and generally opposed to spending reductions altogether.
Throughout it all — the sex scandals, the gaffs, the numerous allegations of corruption, mafia connections, you name it — Italian prime minister Silvio Berlusconi’s popularity remained incredibly strong. While the rest of Europe raised its eyebrows in ever growing bewilderment, the Italian people appeared to approve of their leader in spite of his many missteps or crimes. But now even his political allies have had enough.
Berlusconi’s coalition is struggling with internal dissent. Gianfranco Fini, the head of the Italian parliament and number two in the ruling party Il Popolo della Libertà (“The People of Freedom”) as well as Umberto Bossi of the Lega Nord (“Northern League”) which seeks autonomy from the poorer south of Italy, have confronted the prime minister in recent days.
The internal feud became public drama during a live television broadcast in which Fini criticized Berlusconi’s leadership and announced the formation of yet another party which will be added to Italy’s already splintered political landscape. Berlusconi, obviously caught off guard, chided Fini for exposing the governing party to public mockery and instigated a yelling match not too unbecoming of Italian politicos.
With the political right temporarily fragmented between Berlusconi’s and Fini’s supporters and the left without unified leadership, Italy faces uncertainty amid troubling economic prospects.
Berlusconi previously announced that he wouldn’t seek another term. Without the support of his political friends, running could only result in embarrassment anyway. Bossi lacks a powerful base to run on and suffers from poor health which leaves Fini the only viable contender on the right.