The countdown to the end of Italian Prime Minister Silvio Berlusconi’s political career has begun. Since he entered office in 2006, Italy’s debt has exploded from the initially high 106% of GDP to its current level of 120% of GDP. Nepotism and vote buying have become the norm for the government’s unchecked corruption and bureaucratic bloat. One need only consider the case of Il Quirinale (the presidential palace), which spends four times as much as Buckingham Palace and employs five times as many people as France’s Elysée Palace, to recognize that Italy has lost its financial bearings. The country’s unemployment rate hovers at about 8%, yet every minister in government these days can expect to enjoy the use of multiple assistants, a fancy car and a hefty pension — after only two years of service. With a private sector weakened by government regulations, inflexible labor laws that limit firing decisions, inefficient legal systems that discourage long-term investments and an economy dominated by large, monopolistic companies with close ties to government, it’s no wonder that Italy faces a brain drain of talent, exacerbated by the outflow of investments.
It’s also no wonder that many Italian voters, faced with austerity measures like reduced pension benefits, are furious that politicians won’t scale back their own spending but readily cut benefits to the middle class. But overspending is only one part of a much larger problem. On the other side of the equation, Italy has a culture of tax evasion encouraged by Berlusconi himself, who has stated that individuals should evade taxes higher than 30%. Wealthy Italian business owners have found multiple loopholes in the tax codes, from moving funds offshore to categorizing income as dividends (taxed at a preferential 12%) rather than salary (taxed at the regular 41.5% rate).
In addition to numerous interest groups’ motivation to maintain the status quo, Berlusconi’s growing reliance on his fragile coalition with Umberto Bossi and his Northern League Party ensures that no difficult changes will pass through government. Indeed, the Prime Minister’s multiple court cases and sex scandals over the past five years have shifted his focus and attention from governing responsibly to avoiding prison and maintaining his grip on power. Meanwhile, Bossi has used the opportunity to block any major reforms aimed at avoiding Italy’s financial collapse. Citing public welfare and job protection, the minister has thwarted efforts to increase the retirement age from 65 to 67, reduce pension benefits and increase taxes on the rich.
Other solutions have been proposed, like Pellegrino Capaldo’s plan for a one-off tax on Italy’s wealthiest citizens, which could potentially reduce the debt by 30%. But divisions in the government and powerful political interests virtually guarantee any bill’s failure. True structural reforms would require extreme fiscal and political sacrifice, and no political party in Rome is willing to take such risk.
In general, financial markets favor stability; transitioning to a new government often leads to market decline. Yet Italy faces the opposite situation these days, as it struggles to remain solvent under the current regime mainly because the interest rate on its debt is becoming unsustainable. When American economist Alan Krueger recently predicted that the interest rate on Italy’s debt would drop 2 points if Berlusconi stepped down, he underscored the extent to which the Prime Minister’s leadership is costing Italian taxpayers their future. Indeed, the fact that the government may sell its strategic stakes in Eni (a multinational oil and gas company) and Enel (one of Europe’s largest public utilities) to foreign governments, rather than cut back on spending and/or increase taxes, highlights the gravity of Italy’s crisis. Today the Italian government is not leading for the benefit of its people but for itself.
The clock is ticking for Berlusconi’s government. Even if the Prime Minister wanted to implement genuine reforms aimed at reducing Italy’s tremendous financial burden (which he doesn’t), he no longer has the political capital to do so. Italian citizens feel betrayed by their hypocritical leaders and are ready for a government that will restore their faith in the political process. To accomplish any substantive change in Italy, the current administration must be replaced by an interim government, in the way Greece has just established, which will step in and tackle unpopular but essential economic reforms. Not beholden to the influence of Italy’s numerous interest groups and dedicated to eradicating corruption at every level, this governing body will act in the interest of the next generation, rather than the next election.