ITALY : A THRONE UNDER THREAT / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( A MUST READ )

July 26, 2011 8:33 pm

Italy: A throne under threat

By Guy Dinmore

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Rebellion against Silvio Berlusconi is on the rise within his party
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Italian Premier Silvio Berlusconi looks on at the lower house of parliament prior to a vote to allow the arrest of his Freedom People party lawmaker Alfonso Papa in a corruption probe, in Rome, Wednesday, July 20

It was supposed to be a public demonstration of unity by the party faithful, from cabinet ministers down to small-town mayors, delivering standing ovations and fulsome speeches of support.


Following a tough year of electoral setbacks and personal scandals, a weary yet outwardly defiant Silvio Berlusconi had just installed his loyal 40-year-old justice minister as secretary of their People of Liberty party, setting in motion what was intended to be a gradual and orderly transfer of power after leading Italy’s centre-right for the past 17 years.

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But the display of unanimity was not all it seemed. Among those rising to their feet in applause in that Rome conference centre on July 1 was a group of party veterans working to dislodge the 74-year-old prime minister sooner rather than later – and bypass his choice of the malleable Angelino Alfano, 40, as heir apparent.

“If the market goes against us, then it is clear that this government cannot last long,” reasons one of the rebels, speaking on condition of anonymity. “We have to persuade Berlusconi to quit,” he adds, pointing to a government that has lost credibility in its efforts to prevent the eurozone’s third-largest economy, with a debt mountain of 120 per cent of gross domestic product, from catching Greek contagion.


The internal rebellion is gathering pace amid a disillusionment among Italians with their political elite. It has spawned “end of era” headlines and comparisons with 1993, when the established parties were swept away by a wave of corruption scandals in the midst of an economic crisis.


With his wealth and populist charisma, Mr Berlusconi has survived numerous scandals over the past decade. But his compact with the Italian people – that they would ignore his foibles while all shared greater prosperity – has fallen apart after years of economic stagnation trumped by the “sacrifices” they are now asked to bear under his austerity programme.


This time it is the eurozone sovereign debt crisis and a sharp increase in Italy’s borrowing costs, to their highest since the launch of the euro in 1999, that are driving the veterans to think of an alternative to Mr Berlusconi – possibly as early as this summer. “Berlusconi is spending too much time on laws to protect himself, too engrossed in his personal problems, unable to think of the bigger picture, of the modernisation of the country he had promised,” the rebel says in his parliamentary office.


The axe would also fall on Giulio Tremonti, finance minister. His austerity budget, rushed through parliament this month, is seen as inadequate. Critics say the package lacks genuine reforms to kick-start a near-stagnant economy, yet imposes sacrifices on ordinary people while the well-paid political elite flounders in endless corruption scandals. Tougher spending cuts are needed in a supplementary budget, the person warns.


Mario Baldassarri, former deputy finance minister who was among a small group to quit Mr Berlusconi’s party a year ago, says: “With this budget the government loses its credibility in the markets. The market judgment is: what you did is better than nothing but not good enough. The test is not over.” Now head of the senate finance committee, Mr Baldassarri says the budget does not take into account its deflationary impact and relies too heavily on revenue increases. He estimates that real cuts of €60bn ($87bn) are required, equivalent to some 2.6 per cent of GDP.


That some are scheming to remove Mr Berlusconi is an open secret – even parts of his media empire are reporting it, without mentioning names, as each week brings fresh evidence of the billionaire prime minister’s vulnerability and isolation.


On July 9 a Milan appeals court, ruling in a case that has its origins more than 20 years ago, ordered Mr Berlusconi’s Fininvest holding company to pay €560m to CIR, a media rival, in damages on the basis that Fininvest had wrongfully gained control of the Mondadori publishing house by bribing a judge in 1991.

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Marina Berlusconi, his eldest daughter and chairwoman of Fininvest, denounced the ruling as “the umpteenth scandalous episode of an insane aggression” by the courts against her father, who is facing three separate trials for corruption, tax fraud and sex with an underage prostitute.


Incensed at the ruling, Mr Berlusconi disappeared from public view for a week and spent July 11 – when Italy was under its severest attack to date from the markets – ensconced in Milan with his family and lawyers dealing with Fininvest. However, after a public outcry, he abandoned efforts to insert a clause into the budget legislation that would have allowed Fininvest to delay payment pending a second and final appeal.


If the next generation of Berlusconis, who manage and own parts of his empire, decide that their father’s position as prime minister is a liability, they might favour trying to convince him to withdraw from political life. On the other hand, as some argue, it is only by remaining in power that the padrone can keep at bay the magistrates – and rivals such as Rupert Murdoch, whose Sky Italia satellite broadcaster wants to make further inroads into the local market.


The powers of Mr Berlusconi to protect his own have taken a big dent. Last week, parliament for the first time voted to strip an MP accused of corruption of his immunity from arrest. Alfonso Papa, from the prime minister’s party, was taken to a Naples prison that evening, protesting his innocence. He has not been charged but remains under preventive arrest.


The vote exposed deepening divisions between Mr Berlusconi and his troublesome allies in the rightwing and federalist Northern League, who sided with the opposition in authorising Mr Papa’s detention.


“Be afraid! The handcuffs are coming back,” trumpeted Il Giornale, a Berlusconi family newspaper, warning of a return to the tangentopoli – bribesville – era of the early 1990s, when what the right wing saw as an overzealous judiciary destroyed the political establishment, to be replaced in 1993 by a caretaker government led by Carlo Azeglio Ciampi, then governor of the Bank of Italy.
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Parallels are being drawn. Then, as now, Italy was in the depths of a financial crisis – having just been forced to devalue the lira and exit the European exchange rate mechanism, the euro’s precursor, along with sterling.


Today, notes La Repubblica, a centre-left daily, at least 84 MPs – nearly one-tenth of parliament – are under investigation, awaiting trial or already convicted. Of those, 49 are in Mr Berlusconi’s party. Saverio Romano has become the first serving minister to be ordered to stand trial for ties with the mafia. The opposition centre-left Democrats are not immune from corruption scandals either.


As in 1993, Mr Berlusconi and his allies fear their downfall and replacement by a government of technocrats. An administration of that nature could be given a mandate by Giorgio Napolitano, head of state, to implement economic reforms and a new electoral law before polls in 2013. The man most mentioned as a possible prime minister – also by the clique of dissident veterans – is Mario Monti, a 68-year-old non-party economist and president of Milan’s Bocconi university, who served two terms as a European commissioner.


“The Monti solution would be excellent. The markets would have a trustworthy solution,” says Vincenzo Visco, former centre-left finance minister who also served briefly in the 1993 Ciampi government. “We need radical change. The country has sunk.”


Mr Visco criticises the Tremonti austerity package as inadequate and not credible, while agreeing with the finance minister that market attacks on Italy are not justified by its economic fundamentals and are part of a broader assault against the euro.


Writing in the Financial Times this month, Mr Monti sounded like a man willing to take up the challenge. Italy, he said, urgently needed “to leave behind the policies – and even the philosophy – followed by Mr Tremonti himself, in the three governments led by Mr Berlusconi, all of which have failed to recognise the need to raise Italy’s productivity, competitiveness and growth, and lower its pronounced social inequalities”. In an implicit gesture of support for a caretaker government, Mr Monti added: “The need for a new generation of reforms ... is not widely accepted on either Italian right or left.”


Mr Monti may be willing, but Mr Visco still believes an interim government is unlikely, a view echoed by the less hysterical of commentators. “To have a Monti government, this one has to fail – and there’s no one to make it fail,” says Mr Visco, noting that the Northern League is also weakened by internal power struggles and has little interest in bringing Mr Berlusconi down now.


Those close to the prime minister insist he is not the type to quit. Last Friday – making his first public statement for more than two weeks – Mr Berlusconi insisted the government would “go ahead” and that his coalition with the Northern League was intact. Paralysis is the result, says the daily Corriere della Sera, noting that Italy has a government that can survive votes of confidence because no one wants to risk elections, but does not have the strength to implement meaningful legislation.
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Mr Napolitano, the 86-year-old state president who is a former communist, has earned the respect of many Italians for his calm and calls for national unity in handling the storms of the past weeks.
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Although he is understood to be in contact with Mr Monti and is considering contingency plans in the event of a government collapse, he has also made clear he will not step beyond his constitutional role by forcing Mr Berlusconi’s hand.


Instead Mr Berlusconi’s fate lies more in the hands of highly jittery debt markets and of Athens. Investors initially reacted negatively to Mr Tremonti’s austerity budget – undermining his claims to be the guardian of both Italy and the euro – and gave Italy only a brief respite after eurozone leaders agreed last Thursday on a new bail-out package for Greece.


Italian politicians of all stripes are becoming fluent in the jargon of 10-year yields and spreads over German bunds, as Italy’s performance on the markets becomes the best gauge of the severity of the eurozone crisis, its public debt of €1,900bn nearly three times as large as that of Greece, Portugal and Ireland combined. With yields and spreads at 5.64 per cent and 289 points respectively on Tuesday, Italy’s borrowing costs are considerably higher than when the latest Greek deal was struck.

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“A psychological Rubicon was crossed, in the sense that the markets now no longer perceive the ‘soft’ core of the eurozone to be immune from this crisis,” says Nicholas Spiro, head of Spiro Sovereign Strategy, a London consultancy. “Italy has been put on guard and still remains vulnerable.”

 The same could be said for Mr Berlusconi.
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BUSINESS IN DESPAIR

‘We must change – or everyone will go down together’
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To sum up the mood in Italian business, Emma Marcegaglia, head of Confindustria, the influential industry forum, refers to a survey she recently commissioned of 6,000 of its members. “The message was clear. There is a total distrust in politics, the business community feels abandoned by the government and the only solution is to get on with it ourselves. No one believes government will lead. The situation is very serious,” Ms Marcegaglia tells the Financial Times at her company’s headquarters in Mantua province, east of Milan.


Ms Marcegaglia, 45, whose father founded her family’s eponymous steel parts group, says this loss of faith has been deepened by the failure of politicians on all sides to include in the austerity budget cuts to their own expenses. Confindustria’s members are just as angered by politicians’ failure to sanction a liberalisation of Italy’s professions – from lawyers to pharmacists – whose protected status is often cited by supranational organisations as a reason for Italy’s parlous growth rate of little more than 1 per cent over the past decade.


These failures, in Ms Marcegaglia’s view, are “intolerable” and “totally unacceptable” but also short-sighted, because Italy requires such steps to stem a decline already being felt by small-business owners and families.


“We need reform so deep that not only this government but all governments before it have shied away from it. These reforms will be deep and unpopular. But the country needs to pull together to make them happen. We must increase our growth rate – or everyone will go down together,” Ms Marcegaglia says.


Senior executives and bankers view the market response to the sovereign debt crisis that buffeted Italy’s shores in the past month – and forced the government to pass the austerity bill in record time – as an over-reaction.


They see it as having been fuelled by panic over Italy’s 120 per cent ratio of debt to gross domestic product but failing to take into account a shrinking public deficit of less than 5 per cent and a banking sector that has undertaken recapitalisation of more than €10bn ($14.5bn) since May.


Nonetheless, they share Ms Marcegaglia’s concerns about a system commonly described as “blocked”. As Mario Draghi, the Bank of Italy governor, has outlined, this has manifested itself in a lack of meritocracy, a dearth of women in the workplace and few opportunities for university leavers. So much so that one of the most discussed trends among business owners and graduates alike is leaving Italy to seek better prospects elsewhere. Rachel Sanderson

MOGULS UNDER PRESSURE

Relations between Silvio Berlusconi and Rupert Murdoch switched from the cordial – the latter once sold the former a yacht – to bitter rivalry in the Italian TV market. Now they are united in facing severe political and commercial pressure. Mogul-watchers are looking to the next Forbes list of the world’s influential and affluent. In March, the Berlusconi family came 118th in the billionaires’ ranking, four places and $200m ahead of Mr Murdoch, who was nonetheless placed 13th in the “most powerful” list– one above Mr Berlusconi.
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Copyright The Financial Times Limited 2011.