And so the Eurozone’s woes continue: A potential grand coalition government collapse in Italy has further threatened the recovery of the currency union’s third largest economy. On a continent with a slowly improving, yet fragile economy, there is little room for error. An Italian economic bust would be worse than an error. It could be a disaster.
The recent Italian political quagmire has several causes but none so glaring as the financial indiscretions of former conservative prime minister Silvio Berlusconi, a communications magnate and one of Italy’s wealthiest citizens. Convicted of massive tax fraud in September, his sentence was recently upheld by the Italian Supreme Court. Such convictions are sufficient grounds for expulsion from the Italian Parliament, where he is a sitting senator. In response to the possible loss of his senate seat, severe political tensions arose in the country’s grand coalition government, a union of the primary center-left and center-right parties. Berlusconi, in an apparent effort to prevent his expulsion, attempted to force a parliamentary confidence vote on the government of moderate center-left prime minister Enrico Letta by withdrawing five of his party’s cabinet ministers in the government.
The former prime minister’s ability to carry out such deft political maneuverings stems from his once-firm control of Italy’s political right-wing. The shaky coalition that resulted from February’s indecisive elections led to the formation of the current government under Mr. Letta, who was seen as far more conciliatory than his party’s former leader, Pier Luigi Bersani, who refused a grand coalition. Despite the loss of his premiership, Mr. Berlusconi essentially continued to wield great power over the unstable government by controlling the second-largest partner in the coalition. His feelings about the progress of the government determined its ultimate fate.
Ostensibly as the right’s opposition to a government plan to raise Italy’s value-added tax (VAT) rate to 22 percent, Berlusconi’s recall of his People of Freedom party’s ministers became the impetus for rising opposition to him among the rank-and-file parliamentarians of the party. Foreseeing the potential splintering of the party and the approaching economic calamity that the country would face in the event of an economic meltdown, 23 senators of his party, including some of his staunchest allies, rebelled against him and pledged to support the Letta government. Despite retaining the support of some of his party in the face of the revolt (including Alessandra Mussolini, a high-ranking senator and granddaughter of the former dictator), Berlusconi realized that the government would win the vote and therefore, in a surprising turnaround, voted in favor of the government in the senate.
The domestic consequences of these developments are important, but what of the wider economic implications of an Italian breakdown? Italy’s economy is one of the weakest in the Eurozone. In response to the potential political fallout, bond interest rates increased and the stock market in Milan fell about 2 percent. The country has a public debt of around €2 trillion ($2.7 trillion) and youth unemployment has reached a stunning level of 40 percent. While Greece, and to a lesser extent Ireland, have grabbed the majority of headlines in the past few years due to their acceptance of bailouts from the European Union, Italy represents a far greater proportion (16 percent) of the EU economy than either of those states. The size and influence of Italy’s economy, along with its infamous web of red tape and bureaucracy, corruption problems, rapidly declining foreign investments and shrinking GDP all contribute to Europe’s wariness of the consequences Italy’s financial problems.
The systemic interdependence of Europe’s economies means that economic hardship in a large country will have negative effects across the European Union. Italy’s economy is so big that the EU’s bailout funds would not be sufficient to rescue the ailing Italian markets.
All is not lost, however. Now that Enrico Letta’s government is safe (at least for now), there will be more leeway for the government to enact reforms and improve public finances. Moreover, precisely because Italy has a very large economy, its access to international funds and markets is greater than that of some of the smaller faltering economies of the region.
Overall, the potential effects of Italy’s political and economic issues are uncertain: potentially disastrous, yet possibly salvageable. In a Europe with many other pains, including sparring with Russia over economic influence in Ukraine and continued troubles in Greece and Slovenia, the case of Italy is a headache that the European Union can ill afford. Considering the economic faltering and the upcoming Italian presidency of the EU, a stable government in Italy is essential. Europe and the rest of the world will be watching developments in Rome very closely.
