Italy is more fubar than you imagine possible even taking into account the fact that it is more fubar than you imagine possible. That said, I insist the we are solvent (I am really really and that Italian long term treasuries (BTPs) are a great buy right now.
Please. We need the money. But I am not joking (OK I admit I am not buying BTPs either).
I really have to write about this, since it is the topic of the week and I actually live here. So I will write a long long rambling post (with no useful links).
Update: check corrections at the end of the post.
The current critical situation
Since last summer, Italy has been in play — the price of BTPs fell sharply, that is, the interest rate spread between BTPs and Bunden (German bonds) shot up to around 400 basis point 4%. As a result, Italy enacted a harsh austerity plan with painful spending cuts. The European Union fiscal nagging body (Ecofin) and, more importantly the European Central Bank (ECB) demanded more. This lead to a series of rapidly proposed and revoked emergency plans. The Berlusconi government has agreed on a further do something plan in which sales of public property (mostly land and real estate) play an important role (“First they sell the family silver” H. MacMillan)
The financial system has worked out not necessarily to Italy’s advantage — the latest BTP auction implies paying 6% interest on money raised and the Euro denominated BTP/bund spread is at a record high. The Italian Central Bank claims that Italy is solvent so long as it doesn’t have to pay more than 8%. Investors are clearly not convinced.
Berlusconi’s wish was to temporarily pass this plan as an emergency decree — Presidential decrees temporarily have the force of law until they lapse or are converted into laws by Parliament. His latest problem is that the President in question is President of the Republic Georgio Napolitano not President of the Cabinet Silvio Berlusconi, and Napolitano refused.
The reason for this refusal was that the plan includes the immensely controversial proposal to make it easier for employers to fire employees (Italians employed by firms with more than 15 employees have about as much job security as US public sector employees). This fits the “now more than ever” logic of conservatives proposing the same thing they always propose as a response to every crisis. It is also what happens when you have an internal debate between advocates of austerity and stimulus, finally realize that they are opposites and look for a third way.
Anyway the plan is now a proposed amendment to the 2012 budget bill. Berlusconi has declared the vote on the plan a vote of confidence. This limits debate and prevents obstruction and also means that he will no longer be Prime Minister of the majority of either house of Parliament votes no.
The Political Background
Berlusconi does not, at the moment, have a majority in the Camera dei Deputati (the lower house of Parliament). Various allies have moved their party (or part of it) to opposition. Various individual members of Parliament have switched parties. Less than half of the deputies are now willing to say that they think that Berlusconi should be Prime minister.
This is partly the result of the financial crisis and the unpopularity of austerity, but it is mostly just the we’ve all had it up to hear with Berlusconi and are sick and tired of him (I have been sick and tired of him for 20 years). He always used to be popular for some reason which I could never understand (especially because no one ever admitted voting for him). Now he is very unpopular with a favorable rating in the low thirties. The only major politician with a lower rating is his one remaining important ally Umberto Bossi. Only 35% of adult Italians in a poll expressed support for any of the center-right parties which support Berlusconi. In contrast 45% supported the center left coalition of parties and around 14% supported the coalition of center center parties which used to support Berlusconi but don’t anymore. Also the far left and far right has some support.
It has been repeatedly demonstrated in court that Berlusconi has broken the law. He has chosen not to contest these verdicts (note not accusations). He hasn’t been condemned mostly because of the statue of limitations (which keeps running during trials and appeals in Italy) and partly because of special laws declaring his actions not to be crimes (that would be false accounting) or declaring that the Prime Minister can’t be prosecuted (he can again as those laws were declared unconstitutional as they clearly are). Also sex scandals which are sordid and pathetic and not sexy at all. Also a long record of horrible economic performance under Berlusconi (interrupted by a period of OK economic performance with rapid employment growth during 5 years when he was in opposition). Also, come on it has long been obvious to everyone outside of Italy, and, in fact, everyone who doesn’t rely on Berlusconi controlled TV for their news.
So an amendment which must pass or else Italy might be treated as Greece is treated but at least Berlusconi will no longer be Prime Minister might be voted down. The vote is scheduled for next week. I’m pretty sure the opposition would be willing to vote yes on the condition that Berlusconi resign. He won’t do this.
So what will happen ? Don’t ask me. It is more likely than not that the amendment will pass and Italy will muddle on. The trade unions will not be pleased (they will probably bring two or three million people to Rome to protest — a tiny change in the employment protection law was protested by the largest crowd in Roman history which is long). This will not reassure investors. Also parts of bills can be repealed by referenda and that part of this bill will be repealed.
If the amendment fails, well then maybe investors’ reaction will send Italy to even the bank of Italy admits that things can’t go on this way levels and something will be done. Also even if Berlusconi wins this one he is probably, in Paul Krugman’s words “crostini.”
If Berlusconi is removed what next ? Parliament could decide for early elections. This is a long process as the President of the Republic can only hold them after trying to find a new majority and failing. Elections take a long time. Many members of parliament will lose their jobs (which actually pay well by Italian standards). They won’t like this. So a more likely outcome would be some sort of government of national unity, probably with a Prime minister from the current cabinet. This would reassure investors (surely most AngryBear readers know that when, at a joint press converence, Merkel and Sarkozy were asked if Berlusconi had reassured them, they looked at each other and laughed).
To me the natural candidate is the nerdy tightwad treasury minister Giulio Tremonti who has been fighting for austerity since forever. He and Berlusconi are pretty much no longer on speaking terms (bit of a problem during a financial crisis). The problem is that everyone hates Tremonti, so he isn’t mentioned as a possible national unity Prime Minister.
More likely would be one or another of the underling facilitators of Berlusconi. Yech. Some people dream that Mario Monti the right of center, highly respected former EU competition commissioner might be made Prime Minister. The problem is that Berlusconi will absolutely oppose anyone but Berlusconi (he has never in his life voted confidence in anyone but himself). He still has a whole lot of power. So the government will be weak.
I don’t think it would be good for my health to continue typing this post.
update: Two corrections:
First the current effort to raise money (mostly by selling publicly owned real estate) is an amendment to a “stability bill” not next year’s budget bill.
Second, and more important, the proposed amendment doesn’t include the extremely unpopular provision making it easier to fire workers without proving just cause. Basically, they tried to get the President to do this with an emergency decree, but didn’t dare ask members of parliament to vote for it. The President was a communist so long as the Italian Communist Party lasted, the went with the more moderate part of the party. OK so he was a notoriously boring stuffy conservative establishment communist, but still a communist.