Italian Prime Minister Silvio Berlusconi reneged on his promise to the ECB to implement a full austerity budget. The Financial Times reports:
Silvio Berlusconi’s decision to backtrack on his emergency austerity budget and scrap a proposed tax on the wealthy has triggered a popular outcry while risking market confusion and fresh confrontation with the European Central Bank.
The move…came as Italy saw weaker than expected demand for its first auction of Treasury debt since the ECB stepped in earlier this this moth to buy Italian bonds. In return for bond purchases Rome agreed to undertake sweeping cuts and impose structural reforms amid sovereign debt concerns…
Mario Baldassarri, chairmen of the Senate’s Finance Commission, said scrapping the wealth tax and cuts to local authorities would take away €5bn in total from the austerity budget, offset by only around €500m raised from other small reforms.
With the Greek crisis far from over and important hurdles still ahead, Berlusconi can’t afford to alienate the ECB. This past month alone the ECB spent a joint €36 billion protecting Italian and Spanish bonds and containing their borrowing costs. In September Italy’s treasury will be put to further test when €60 billion in redemptions come due. With markets jittery, Italy is fast descending into deeper trouble with fewer friends.
Prime Minister Berlusconi is the most successful Italian politician since Benito Mussolini. He has grabbed more power and held onto it longer than any other Italian political leader since World War Two. Unfortunately, the nature of Berlusconi’s coalition makes it almost impossible for the government to take tough decisions. Berslusconi can preside in Italy, but he can’t rule it.
The opposition is no better; the trade unions and other interest groups on the left are no more capable of agreeing on a substantial program of economic reform than the civil servants, regional leaders and business interests who support Berlusconi.
Italy is what it is, and its friends (Via Meadia, despite occasional frustration with Italian politics, is a great friend and a great fan) must accept that. The eurozone’s basic problem boils down to how Italy and Germany can live under a currency union when neither country can adjust its economic culture to the needs of the other. It seems more and more likely that they can’t.