November 4, 2011 / 3:25 PM / 8 years ago

Analysis: Berlusconi cannot deliver reforms markets want

ROME (Reuters) - Even if Silvio Berlusconi clings on to his dwindling majority to survive key parliamentary votes in the next few weeks, the prime minister will be unable to prevent Italy being sucked ever deeper into the euro zone debt crisis.

The stringent reform demands being made on Italy by its euro zone partners and financial markets would be a challenge even for a strong leader of a cohesive parliamentary majority in a country with rapid and efficient legislative procedures.

The situation in Rome is exactly the opposite.

But if the great survivor of Italian politics is forced out, a replacement government of technocrats would have a better chance of enacting the tough measures necessary to put an economy moribund for years back on its feet.

Berlusconi always avoided unpopular reforms even when he had huge majorities in parliament. He now has a wafer thin one, and heads a fractious coalition that is more concerned with its electoral prospects than Italy’s rising bond yields.

The result is that calls for Italy to take steps like easing firing restrictions, scrapping generous length-of-service pensions, imposing a wealth tax or significantly liberalizing professions have little or no chance of being heeded.

“The fiscal and structural reforms demanded of Rome are simply not possible under the current government,” said Nicholas Spiro, director of debt consultancy Spiro Sovereign Strategy.

Berlusconi agreed at a G20 summit in France to IMF monitoring of promised economic reforms which markets do not trust him to carry out. For him, this may soon be irrelevant as he returns to face what looks increasingly like a deadly rebellion by his own supporters.

There is a growing view both inside and outside the country that only a technocrat government of unelected experts can take the kind of steps required, mainly because it does not have to worry about being re-elected.

“Historically, technocrat governments in Italy have been able to pass pro-growth structural reforms, including politically difficult labor market reforms,” said Barclays Capital analyst Fabio Fois.

Governments such as those led by former central bankers Carlo Azeglio Ciampi and Lamberto Dini in the early 1990s saved Italy from market crises even more acute than the present one.

“I think the political parties would have a big incentive to go through the painful policy adjustment now, before the next election due in 2013, so that whoever wins won’t have to do it later,” said Fois.

Berlusconi is a seductive communicator who has made his 17 year-long political fortune by making promises, not by keeping them. While promises may impress voters they are not enough for German Chancellor Angela Merkel or financial markets.

Italy’s bond yields, now well above 6 percent, rise every time he announces new measures which are repeatedly judged to be too vague and lacking a precise time frame for their approval.


The 75 year-old media tycoon has become the core of the problem because his credibility has sunk so far that whatever reforms he announced would probably be dismissed by markets. And even if he wanted to take necessary but unpopular steps, his coalition would not allow him to.

French President Nicholas Sarkozy crystallised the issue at the meeting of Group of 20 leaders on Thursday when he told reporters he was less concerned about the content of Italy’s budget measures than whether they would be implemented.

Berlusconi faces a crunch vote in parliament on Tuesday that could bring him down and, with reports of several defectors from the government’s ranks, a failure to pull off another of his hallmark narrow escapes could have a positive and dramatic effect on Italian markets.

The government’s fall would reduce the interest rate spread between Italian and German benchmark bonds, currently around 4.6 percent, by a full percentage point, according to a Reuters’ survey of ten fund managers, market economists and strategists.

In Berlusconi’s defense, it is bemusing to witness the speed with which market sentiment on Italy has turned, and for no clearly identifiable, objective reason.

Until mid-summer analysts were confident the euro zone’s third largest economy would remain on the sidelines of the region’s debt crisis due a modest budget deficit, low private debt, low foreign debt and a solid banking system.

True, it has a massive public debt and chronically weak growth. But both problems have been there for years — or decades in the case of the debt — and had never raised any concern over the country’s credit-worthiness.

After years of routinely ignoring calls for structural reform from the IMF and other bodies, Italy is having to realize that the situation has suddenly changed due to external factors outside its control.

Some analysts say structural reform is not the real problem and Italy’s bond sell-off is due to a self-fulfilling loss of confidence which can now only be reversed if Europe finds a way to underwrite Rome’s funding needs for the next three years.

“The bond markets were not the least bit concerned about Italian structural reforms in June and are no more so now,” said Spiro.

What is certain is that the market perception of Italy’s creditworthiness needs to change fast, and that is highly unlikely to happen while Berlusconi is in charge.

Additional reporting by Giulio Piovaccari in Milan, editing by Mike Peacock

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