TRASHING THE LIFEBOAT / THE ECONOMIST ( VERY HIGHLY RECOMMENDED READING )

Italy

Trashing the lifeboat

Could Italy sink the euro?

Sep 3rd 2011
ROME
from the print edition

Di Montezemolo volunteers to do his bit .


IN JULY Silvio Berlusconi, Italy’s prime minister and escape-artist extraordinary, sparked the first of several market panics over Italy’s public debt by vowing to water down an already soggy package of deficit-reduction measures. He was forced to retreat by the resulting turmoil. But the threat he poses to the euro was again made clear this week when he pitched his country’s public finances into further chaos, leaving a hole of at least €4 billion-5 billion ($5.8 billion-7.2 billion) in the latest of two emergency budgets designed to get his country out of the fix in which it has been trapped for the past two months.


Two things now stand between Italy and a debt crisis vastly more menacing to the single currency than any so far on the euro-zone periphery: support for Italy’s bonds from the European Central Bank (which has bought some €30 billion-worth since mid-August), and a €45.5 billion deficit-reduction plan that the ECB demanded in return for its help.


When this was unveiled by Mr Berlusconi on August 12th, investors might have been forgiven for thinking that—bar the odd amendment—the same plan would be set before parliament. But in Italy nothing is safe from modification, and on August 29th Mr Berlusconi unpicked his package, throwing out the measure he most disliked, a surtax on top incomes in the private sector. (Embarrassingly, the multimillionaire chairman of Ferrari, Luca di Montezemolo, offered to pay more tax, saying “you have to begin by asking it of those who have most”.) To placate Italy’s irate local mayors and governors, Mr Berlusconi lightened the burden of savings they were supposed to have made.


Some new measures were put in. The government promised to save money by abolishing the provincial administrations and halving the number of national lawmakers. But it said it would do so with constitutional laws, which are notoriously difficult to get approved. The immediate savings would come from postponing the retirement of many Italians by excluding from their pension calculations time spent at university or doing military service. The measure was understandably seen as penalising those who failed to dodge conscription, and simply robbing those who chose higher education (since graduates in Italy have to make a payment to the treasury for their university courses to be counted as time worked). The public outcry looks likely to force Mr Berlusconi into a U-turn that would enlarge still further the hole in his former austerity package.


That alone is enough to cast doubt on the ECB’s readiness to continue buying Italian debt. But there is another factor. As the price of intervention, the bank’s president, Jean-Claude Trichet, and his successor-designate, Mario Draghi, reportedly required not only the pushing through of the package that Mr Berlusconi has just undone, but also a comprehensive programme of privatisation and liberalisation. And, of that, there has never been more than a trace in the government’s plans.