EUROPEAN DIARY:THE OTHER day I bumped into an Italian pal. He was perplexed about Silvio Berlusconi's extravagant bedroom antics and alarmed about the wider debt debacle, yet still he allowed himself a tiny measure of optimism.
“The crisis will be over in 2013 because Merkel will be gone and Berlusconi will be gone,” he said. He paused for a moment. Then he added a telling caveat.
“This assumes we survive that long.” In Brussels these days, there’s no end of doom about Italy. The third largest euro zone country is under siege in markets, prompting the European Central Bank to buy its bonds.
Under duress, Rome has introduced swingeing new budget plan. Towering over everything, however, is the judicial circus surrounding the increasingly wayward Berlusconi. Fears grow daily that an unseemly farce risks turning to tragedy.
Italians argue that nothing radical has changed in their country’s economic outlook. In essence that is true. It is nothing new to point out that Italy’s public debt is too high and its growth prospects too low. Neither is it anything new to say Berlusconi’s failure to reform the economy has amplified its frailty.
But that conveniently ignores the extent to which the advancing crisis has led to a fundamental change in the way markets evaluate financial risk. Hoping for the best is no longer an option.
Aggravating the situation is the sheer scale of the Italian economy. Like Spain the country is both too big to save and too big to fail. Furthermore, their combined weakness has potential to create something akin to nuclear meltdown in the euro zone as one big country contaminates the next.
Although Spain reluctantly yielded to the clamour for austerity last year, Italy is a more recent convert to cutbacks and questions abound about Berlusconi’s willingness to do the business.
Time was the quixotic ways of the billionaire premier made him a figure of fun and gentle ridicule in European circles. However, the “Bunga Bunga” scandal and all that followed it points to something dark and sinister. As the debt crisis escalates, there are new reasons to be concerned about the man’s brazen self-indulgence.
People wonder whether he has any limits. Last month he was supposed to meet Milanese prosecutors in Rome in connection with blackmail allegations. On that very day, he sought and was granted meetings in Brussels and Strasbourg with European Council president Herman Van Rompuy and EU Commission president José Manuel Barroso.
Officials cringed. The sense was that this was no more than an out-of-town set-piece for a black pantomime back home.
Yet the situation is deadly serious. Last week the Corriere Della Sera published the text of a letter to Berlusconi from the ECB in August which put it up to him to take decisive steps to restore confidence. Markets were in uproar. Italian borrowing costs rose to the point at which the ECB felt compelled to intervene, at the cost of unity on its governing board.
The letter was co-signed by outgoing ECB president Jean-Claude Trichet and his successor Mario Draghi, who just happens to be chief of the Bank of Italy. The message was unambiguous. “The governing council considers that Italy needs to urgently underpin the standing of its sovereign signature and its commitment to fiscal sustainability and structural reforms,” they wrote.
“We trust that the government will take all the appropriate actions.” The Berlusconi administration did indeed take action, but it has been wavering ever since. When it downgraded Italy last Friday, ratings agency Fitch said a “more radical and sustained” effort was necessary.
In this unsettling panorama Draghi’s anointment ECB chief is not without significance, for he knows better than most the stresses and strains which are at work in Rome. But Draghi is not unique. At official level, his fellow-countrymen run most of the key institutions in the battle against the crisis.
Marco Buti, the director-general for economic and financial affairs in the European Commission, is Italian. So too is Andrea Enria, chairman of the European Banking Authority.
The same goes for Prof Vittorio Grilli, president of the EU’s Economic and Financial Committee. The “euro working group” of the committee, which comprises top finance ministry officials from member states, prepares the work of euro zone finance ministers.
Leaked transcripts of Silvio’s rants on the phone raise questions as to whether he would pay a blind bit of notice to any of the concerns raised from these quarters.
He seems to see himself as some sort of a wronged super-stud, with critics motivated by mere jealousy. In Europe, however, he is seen as a wrong prime minister, in the wrong place at the wrong time. He wouldn’t be the first.
