Crisis in Italy Deepens, as Bond Yields Hit Record Highs
ROME — A day after Prime Minister Silvio Berlusconi pledged to step down once the Italian parliament passes austerity measures, Italy was engulfed in political chaos that has pushed the euro zone to its biggest test yet and raised the once unthinkable prospect of a major industrial economy going bankrupt.
With borrowing rates now soaring at 7.4 percent, levels at which smaller euro zone countries sought bailouts, Italian lawmakers were frantically negotiating a way forward, while European leaders scrambled to forge a backup plan for a country too big to bail out.
The uncertainty over the timing of Mr. Berlusconi’s departure — and questions over what would follow — kept Italy in the crosshairs of the financial markets Wednesday, and prompted President Giorgio Napolitano to issue a statement reaffirming that t the prime minister would resign as announced and that the Italian parliament would approve austerity measures “within a few days.”
Indeed, the country’s fate appeared in the hands not only of markets, but also of Mr. Napolitano, an 86-year-old former Communist who must exercise moral suasion on a government known more for its sex scandals than its economic policies.
In a statement on Wednesday, the president said he would either form a new government quickly or take the necessary steps to go to early elections, adding that in any case “emergency measures” could be adopted “at any time,” so there was no risk of prolonged political instability in Italy.
While Mr. Berlusconi has said he wants to go to elections, momentum appeared to be building on Wednesday for a government guided by a respected non-politician. On Wednesday evening, Mr. Napolitano named Mario Monti, a former European Commissioner and most widely discussed candidate to guide such a government, a senator for life, a move that put Mr. Monti’s name in the spotlight.
The political turmoil comes at a time of rising risk. Barclay’s bank on Wednesday issued a note saying that Italy “may be beyond the point of no return,” while other financial analysts — and officials in the Italian Finance Ministry — said the country could survive for several more quarters even with bond yields around 7 percent.
Nevertheless, the marketplace jitters spurred Italy’s deadlocked parliament to move with uncharacteristic urgency, agreeing to start discussion of the emergency measures on Wednesday, with the aim of adopting them as early as the weekend, several lawmakers said.
But concerns were widespread that the substance of the measures, which were officially presented by Finance Minister Giulio Tremonti Wednesday evening, might not live up to the stringent demands of the current financial markets.
A letter to Mr. Tremonti sent last week by Olli Rehn, European commissioner for economic and monetary affairs, expressed doubts that they would “ensure the achievement of a balanced budget in 2013.”
It also called on the government to draft additional measures to reach targets.
Attached to the letter was a 39-point questionnaire asking for detailed explanations of how Italy intended to maintain its promises, a survey that exposed the vagaries of the Italian pledges to European authorities.
“Could the government spell out in detail its plans on the sale of state-owned assets?” read one question. “Is the government considering reintroducing the property tax on owner-occupied dwellings?” read another, referring to a tax that Mr. Berlusconi abolished in accordance with a campaign promise.
The difficulties in proposing, let alone enforcing, the measures stem from deep divisions within the center-right coalition, a patchwork of conflicting vested interests.
In August, the European Central Bank demanded structural changes in exchange for buying Italian debt. Parliament pushed through some debt-reducing measures, including cuts to local government and tax hikes. But some experts said that Euroskeptic factions in the Berlusconi government, most notably the Northern League, had never taken the demands seriously.
A delegation from the European Commission and the European Central Bank began meeting with officials in Rome on Wednesday to step up surveillance of Italy’s reform program, days after the International Monetary Fund said it, too, would monitor Italy’s progress.
The debt crisis has dovetailed not only with the slow collapse of the Berlusconi government but also with the end of a 17-year era in which Mr. Berlusconi radically transformed — and personalized — Italian politics, leaving the country effectively unable to carry out a political transition normal in other democracies.
“This agony is long because it’s not the end of a government but the end of a system,” said Massimo Franco, a political commentator for Corriere della Sera. “And because the person in question is one who doesn’t have a sense of the state, someone who subordinates everything to his own personal survival.”
Political jockeying on Wednesday was a further sign that the transition towards a post-Berlusconi era will be bumpy, at least in the short-run. The prime minister is demanding immediate elections — though that is up to the president to decide — in order to avoid a government of technocrats.
But most opposition parties, and some members of Mr. Berlusconi’s party, are averse to the polls. There are concerns that the pressure on Italy cannot withstand a prolonged period of political inertia during a campaign that might well reap even greater uncertainty.
None of the actors in Italy’s current political galaxy inspires great confidence. the center-right coalition has talked about deep changes in the economy but has proven unwilling to enact them, while the center-left opposition is weak and divided, including over economic policies.
Even as the center-left opposition leader Pier Luigi Bersani insisted that his Democratic Party would support a unity government led by a non-politician ahead of early elections, others are not convinced that his party is ready to govern.
“The opposition is unprepared for these elections,” said Roberto D’Alimonte, a professor of political science at LUISS University. “They have to make critical decisions in a hurry, but I doubt they’ll be able to do it in time to inspire voters.” That, he predicted, would result in “very tense elections.”
Complicating matters is Italy’s current electoral law, passed in 2005 and designed to transform Italy’s multi-party parliament into a more governable two-party American style system. But it gave party leaders rather than caucuses the power to choose their candidate lists, preventing voters from choosing who would represent them. Italy’s Constitutional Court is now deciding whether or not to put the law to a referendum.
Mr. Berlusconi’s impending exit from the political arena does not mean that his public career is over.
Even if he appoints the leader of his People of Liberties party, Angelino Alfano, as his successor, as he has said he intends to do, “Berlusconi will be there,” said Mr. D’Alimonte, “I don’t know if he could still win but he still has loyal support.” Despite all the scandals, “he still gets 25 percent of the vote.”