Italy Risks Post-Berlusconi Hangover By RICHARD BARLEY
Silvio Berlusconi has largely lost the confidence of investors and policy makers. But would his departure ease the euro crisis? The Italian prime minister's hold on power appears increasingly shaky as Europe's demand for deep structural reform has exacerbated tensions between the coalition's key partners, Mr. Berlusconi's People of Freedom party and the Northern League. Many hope he might be replaced by a technocratic government with the power to make difficult decisions. A bigger risk is that early elections lead to instability and government paralysis.
Regular elections are next due in 2013, but Mr. Berlusconi's grip on parliament has waned since 2008's vote, with the coalition's share of seats in the lower house falling to 49% from 53%, RBS notes. Support from the electorate is also shrinking. In October, an opinion poll showed just 26.1% of voters would support Mr. Berlusconi's party in an election, down from 37.4% in 2008. But the main opposition party, the Democratic Party, has also slipped. That could mean a new government might not be strong enough to push through contentious reforms.
Given the serious problems facing Italy, Italian President Giorgio Napolitano could try to appoint a technocratic government to see out the parliamentary term, made up of economic specialists. This holds some promise. In the 1990s, Italy halted a relentless rise in its debt and cut its deficit under the leadership of technocratic governments. Italian debt peaked in 1994 at 121.8% of GDP, according to Moody's, but then fell as the country managed to run a consistent and sizable primary budget surplus. But a technocratic government would require bipartisan support; the Northern League has already said it won't back one.
Times have changed, too. In the 1990s, the need to reduce the deficit and debt was driven by the desire to join the euro, which was seen as a promise of prosperity. Italy also had more policy tools at its disposal. The task now is more urgent: Italy must ensure it maintains bond-market access at reasonable rates and boost its growth potential. But the country is locked into the euro and must deal with pressure from other European countries and the European Central Bank. For a technocratic government, the political challenge might be too great. But if the alternative is no government at all, Mr. Berlusconi might be the least-worst option.
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