And even if he does, should we care?
- The Joker is back
- Italian porn director plans movie about Berlusconi’s sex life
- Ex Berlusconi deputy and Mafia convict arrested in Dubai
These are not typical headlines for any other politician of the Western World but for Berlusconi, they are par for the course. Controversial, colourful, corrupt – the adjectives vary significantly according to your view of this 76 year old.
The latest development in this soap box saga may see Berlusconi thrown out of the Parliament he has dominated for two decades. On Monday a special Senate Committee is to vote as to whether Berlusconi will lose his seat in Parliament after his jail sentence for tax fraud. If that happens, he may choose to bring down the current Italian government by pulling his party out of the coalition. Opinion is mixed as to whether he will take such radical action, although the threat has been explicit for some weeks.
As Berlusconi is fighting for his political life, it is no surprise that he is playing dirty. Reuters is reporting that he has made a video responding to the (anticipated) fall of the Italian government. He is sending out a not-so-subtle message to his coalition partners is that if you kick me out of politics, then you’ll get kicked out of government. The intimidation is clear.
Amidst all this political brinksmanship, Italy still has significant economic problems. It has the third largest debt pile in the world, a 130% debt to GDP ratio, and its economy has barely grown for over a decade. Mario Draghi has done more for his country in his OMT promise (by bringing down borrowing costs on this towering debt) than all of the Italian political class together. None of which are in a position to be complacent. The fragile coalition bickering over the carcass of Berlusconi’s career brings to mind the Roman Emperor Nero playing the fiddle (violin) while Rome burned. The economy may not be up in flames but it is smoldering.
I have read a lot of broker research as to the likelihood of Berlusconi bringing down the government. Most says he won’t, but that risks that he will are not insignificant. JPMorgan is more directly hedging its bets – “Berlusconi – probably – will not collapse the Italian government”. Frankly whether the Italian government falls or not thanks to Berlusconi is unpredictable. Analysts like to assign probabilities to events, but this one is beyond such reasoning– who knows what is in this 76 year old’s mind?
Tthe more important question is not what he’ll do but whether we should care. We may enjoy amusing ourselves at Italy’s expense and gossiping and scandalizing over Berlusconi’s behavior but economically does it matter? I think not so much.
Italy has never been stable politically – it has had a succession of fragile coalition governments for decades. It is the nature of Italian politics. The current situation is nothing new. Because of that, Italy has a strong civil service that gets on with running the country. Businesses and people do not expect political stability, and their decisions are mostly unaffected by it.
Italy, like Germany, was not united into a country until late 1800s. Before that neither country existed, both were just a collection of different states. And again, like Germany, this means that the individual states of Italy have a lot of power and local control. Remember that Belgium had no government for 19 months and won a Guinness World Record for it. The economy did not collapse.
Market sentiment has changed markedly. The eurozone is no longer expected to break up. The interest rate cycle is now dominating sentiment, not EZ politics. Compare this to the heady doomsdays in 2011 and 2012, when EZ political risk prevailed. Italian and Spanish ten-year borrowing costs screeched out to around 7%. No more. Draghi’s determination to hold the currency bloc together and more recently better EZ economic news have ensured that the euro’s survival is no longer questioned. Of course the Eurosceptic Brits continue in their views but this is a vision clouded by the fact the UK was thrown out of the party early. In this environment, another failed Italian government is just that, no more and no less. Not ideal economically but it should not constitute a European wide crisis.
It’s not just Italy where the power of politics to cause market mayhem is reduced. The market reaction to the rows in Washington over the US budget deficit is “been there, done that, no longer care”. A third Greek bailout is met with yawns. Like SARS, the nightmare scenarios have not occurred – war has not broken out. One of the most remarkable things since the eurozone crisis began four years ago is that no anti-euro or anti-EU party has got itself in power. The rapid rise of right wing, nationalistic governments has not occurred. Mainstream parties still occupy power, even if rhetoric is occasionally Eurosceptic as it plays well to voters.
There is a view that in the May 2014 European parliament elections, there could be a significant shift to anti-EU parties not seen in national elections. It is possible as the turnout for European elections is less than for national ones and so the protest vote can have a larger impact. That may be so but I doubt the swing will be large enough to affect the Parliament’s legislative efforts to sort out the eurozone mess. Maybe this looking for the next disaster pessimism is a reaction to not foreseeing the financial crisis. So many failed in that, they are much more sensitive to future risks. I suggest the main risk now is over negativity.
A failed Italian government will no longer be met with howls of investor anguish but more likely boredom. Markets are more willing to accept that a cobbled together coalition of sorts will eventually be created with enough power to take a few key decisions. Clearly this is not economically ideal, but Italy is a democracy.
So is my shrug the shoulders theory backed up by market moves? The Italian stock market has lagged the other European exchanges showing some pricing in of political risk but it is not a huge underperformance. In the last 12 months, the FTSE is up 13%, the Dax up 15%, and the FTSE MIB is up 8%. Ten year Italian government bonds are yielding 4.5%, no where near the crisis levels. According to one broker note I read, volatility on Italian bonds has been below UK gilts. Markets are mostly ambivalent to Berlusconi’s efforts to cause mayhem.
If I had a crystal ball, what would I predict newspaper headlines to say next week?
“Berlusconi’s thrown out – Italian government collapses”
Well both these headlines have been written many times before and yet Berlusconi has always bounced back and new governments been created. Maybe that’s why Italians keep voting for him – he epitomizes their political system.
