With Berlusconi Gone, Will Europe’s Leaders Save the Euro?: View

By the Editors Nov 9, 2011 7:00 AM GMT+0700

For years observers have wondered what it would take to unseat Silvio Berlusconi as Italy’s prime minister. Serial scandals, prosecutions (three pending at last count), diplomatic pratfalls and a long record of economic failure did not suffice.

This week, as Berlusconi’s dazzling unfitness for office advanced the prospects of financial breakdown in Italy, across the European Union and in the wider world economy, his tenacity appeared to fail at last.

Defections among supporters denied Berlusconi a majority in a budget vote yesterday. The measure passed because of abstentions, but it was an implicit vote of no confidence and signaled the end. Berlusconi has said he will resign after an austerity package passes Parliament next week.

Why wait? The sooner Berlusconi quits, the better. What matters most is to avoid, as far as possible, any further delay and uncertainty.

Berlusconi’s comments in the margins of last week’s Group of 20 meeting in Cannes, France, moved Europe’s financial emergency to its newest and most serious phase. As doubts gathered around Italy’s creditworthiness and the ability of its government to address the problem, he accepted policy monitoring by the International Monetary Fund but said Italy didn’t need the fund’s financial help. He reportedly declined a low-interest loan. “Italy does not feel the crisis,” he said. “The restaurants are full.”

That stunned financial markets, destroying what little credibility Berlusconi still enjoyed -- and, in a crisis of confidence, credibility is all. Yields on Italian bonds approached 7 percent. Their spread over German bonds rose to nearly 5 percentage points. Lenders judge Italian debt to be as risky as the debts of Greece, Ireland and Portugal were when those countries were forced to seek bailouts from the EU and IMF.

The best outcome now would be what Italians call an emergency or “technical” government -- an inauspicious term, admittedly. The president would appoint a respected nonpolitician as prime minister and tell him to push through stabilizing fiscal measures like those Berlusconi agreed to but failed to speed through.

Mario Monti, a technocrat and former EU commissioner, has been suggested for the role. He commands respect at home and abroad, and would be a good choice. His task would be far from easy: He would have to win support in Parliament for unpopular tax increases, spending cuts and reforms to pension and employment law. In Italy, that idea is not unprecedented: The country went through something similar, albeit less demanding, in the 1990s. It remains a tall order.

Italy’s public debt stands at 120 percent of gross domestic product. That’s far too high, but doesn’t make the government insolvent. Italy’s public finances are in far better shape than those of Greece, Ireland and Portugal, and with competent leadership its government can retrieve the situation. It’s vital that it does.

Italy is the euro region’s third-largest economy, after Germany and France. Financial breakdown on such a scale would be the heaviest blow yet to strike the world economy, and it would come at a time of exceptional fragility, with governments’ ability to respond severely depleted.

This underlines a crucial point. Much as Berlusconi’s exit may please his fellow European leaders, they cannot stand aside as Italy threatens to unravel. On the evidence of recent months, there is every reason to fear they will. Lately Europe’s collective failures of leadership have rivaled and even exceeded the Italian prime minister’s.

The euro area still lacks anything close to a credible response to its financial emergency. Europe’s leaders must recognize that Greece and probably Portugal need to default, and raise at least 3 trillion euros to ensure bank recapitalizations and guarantee the financing needs of solvent governments. With the recent change at the top, the European Central Bank has a competent new president in Mario Draghi -- but the ECB still refuses to do for the EU what the Federal Reserve does for the United States, and backstop public finances. To cap it all, the message went out from Nicolas Sarkozy of France and Angela Merkel of Germany last week in Cannes that countries such as Greece might, after all, one day leave the euro.

Is Europe committed to saving the euro or not? Restoring financial stability in the EU was never going to be easy. But Europe’s dithering governments, with Berlusconi far too long in the vanguard, have made that task vastly more difficult than it needed to be.

To contact the Bloomberg View editorial board: view@bloomberg.net.