Crisis contagion is back in Europe, and Silvio Berlusconi’s bid for political resurrection is taking the blame.
Spain’s finance minister, Luis de Guindoa, linked Mr. Berlusconi’s surprise Saturday announcement that he would seek a fourth term as Italy’s prime minister to the sudden surge in Spanish bond yields.
Italian bond yields also rose in response to the political turmoil in the country over the weekend, when Mr. Berlusconi’s centre-right party withdrew its support for the unelected government of Prime Minster Mario Monti, and Mr. Monti said he would resign, triggering early elections.
The yield on Spain’s 10-year bond rose 20 basis points (100 basis point equals one percentage point) on Monday, a sharp increase after several months of relative calm. Spain’s higher borrowing costs can only push the country closer to a sovereign bailout, in the form of bond purchases by the European Stability Mechanism, the permanent, €500-billion bailout fund, in conjunction with the European Central Bank.
“When there are uncertainties about the political stability of a neighbouring country, such as Italy, that immediately affects us,” Mr. de Gruindos said in an interview on Spanish public radio.
Asked whether the rising Italian and Spanish bond yields would move Spain closer to asking the ESM and the ECB to launch a Spanish bond-buying program, he said, “It is an instrument that the Spanish government is considering and we will take the decision that is best for Spain.”
Mr. Berlusconi’s comeback attempt had been considered unlikely given his age, 76, and his pronouncements that he was happy to escape from Italy’s non-stop political chaos. He resigned as Italy’s three-time prime minister 13 months ago, at the height of the country’s sovereign debt crisis, and was replaced by Mr. Monti, now 69, an economist and former European commissioner who immediately launched a “Save Italy” campaign dominated by austerity and economic reform.
Mr. Berlusconi said he is now reluctantly campaigning again because Mr. Monti’s austerity measures have brought Italy to “the edge of the abyss,” deepening Italy’s recession. Italy’s gross domestic product is expected to fall by 2.3 per cent this year, the euro zone’s second-worst performance, after Greece. Industrial output is plummeting and the jobless rate is going in the opposite direction. Youth unemployment is about 36 per cent and climbing.
In spite of the sinking economy, Mr. Monti (who intends to resign immediately after the Italian budget vote later this month, leading to elections in February) enjoyed considerable support among Italian business leaders and European politicians and European Union technocrats.
Collectively, they fear that his successor, who might be Mr. Berlusconi, will abandon austerity and the economic reform efforts that they consider essential to restoring Italy’s competitiveness. Some Italian business groups and industrial leaders are urging Mr. Monti to abandon his political neutrality and run in the next election.
Since Italy joined the euro, it has been among the most sluggish European economies, with barely perceptible growth in the past dozen years. During much of that time, Mr. Berlusconi was prime minister. He swept to power in 1994 promising reforms that never materialized.
The reaction among investors and senior European officials to Mr. Berlusconi’s fresh campaign was largely negative. The Milan bourse fell 3.5 per cent at one point, though recovered somewhat to finish the day down 2.2 per cent. Italian bond yields, which had risen Friday, climbed again Monday by more than 30 basis points, putting the yield at a hefty 4.8 per cent.
In an interview with German’s Spiegel Online on Monday, German Foreign Minister Guido Westerwelle said he feared that Mr. Monti’s effective ouster could hurt the euro zone, which is in double-dip recession. “Italy can’t stall at two-thirds of the reform process,” he said. “That wouldn’t cause turbulence for just Italy, but also for Europe.”
The fear is that Italy’s next government will either drop, or lose momentum on, planned reforms including legislation on tax reform, simplifying Italy’s notoriously inefficient bureaucracy; and a constitutional amendment that would require balanced budgets.
Italy’s budget deficit is small by European standards, but its debt, at about 125 per cent of gross domestic product, is the second highest, after Greece’s.
While Mr. Belusconi has yet to unveil his own version of “Save Italy,” his track record suggests his reform efforts would come up short if he were to win.
“Berlusconi-Nero fiddling as Rome burns is an old image for cartoonists but is still valid,” James Walston, professor of politics at the American University of Rome, wrote in his blog Monday.