The man compared to the most debauched of Roman emperors – a modern day Nero – is spending his last hours as Italy’s prime minister, a position he has held for the better part of two decades. May Bunga Bunga boy go out with a smile on his face, for his reputation as the destroyer of the world’s seventh largest economy is undeserved.
To be sure, the sins of Silvio Berlusconi were many and varied. There were the endless sex scandals and corruption trials, allegations of Mafia involvement and entirely valid charges of conflict of interest because of his dual role as Italy’s biggest media mogul and head of government. Imagine if Rupert Murdoch were prime minister of Britain, while still in control of his TV and newspaper empire, plus the BBC.
Mr. Berlusconi’s biggest sin was taking a bad situation – the sclerotic Italian economy – and not improving it, even though his 2008 election victory handed him a large majority, one that he could have exploited to make Italy competitive. Instead, it was girls, girls, girls.
But it’s a stretch to say the aging Lothario wrecked the economy. That’s the common view in “wealthy” northern Europe (read: Germany), which is no doubt thrilled that Mr. Berlusconi will seek permanent refuge in his luxury villas, where he can do no harm. There is even some evidence that Germany accelerated his political demise. Note that the European Central Bank, still haunted by old Bundesbankers, was hardly an enthusiastic buyer of Italian bonds in recent weeks. The yields duly soared, breaching the 7-per-cent red-line level that had snuffed the life out of Greek, Irish and Portuguese debt markets. Suddenly it was arrivederci Silvio, felled not by the ladies but by the liabilities.
The common view of the Italian economy is somewhere between exaggerated and wrong. Italy’s expected 2011 budget deficit, at 4 per cent of gross domestic product, is one of the lowest in Europe and about a third less than the average of the 34 OECD countries (the rich countries’ club). It is expected to fall to 2.2 per cent next year, according to Deutsche Bank. That’s not bad compared to the expected 2012 deficit in the United States of 6.2 per cent, 6.9 per cent in Britain and 5 per cent in France and Spain.
Italy is running a primary budget surplus, that is, a surplus when debt interest expense is stripped out. Private debt levels are low; Italian families generally spend no more than they earn and mortgages are rare. It has a highly diversified economy and never went through the housing boom-bust cycle that pounded Spain, Ireland and the United States. It is still obscenely rich by global standards. Friday’s Financial Times reported that the net average worth per household is €350,000 ($487,000 Canadian), implying there is enough loot lying around for Italy to save itself.
The problem – and it’s a biggie – is the national debt. At €1.9-trillion, it is equivalent to 120 per cent of GDP. Worse, Italy has to issue €233-billion of bonds next year. As Italian yields rose this week to unsustainable levels, reaching 7.4 per cent at one point (they fell to 6.5 per cent Friday), European leaders were jolted by spasms of fear, because the European bailout fund is wholly inadequate to rescue a country the size of Italy should it get shut out of the debt markets.
But Italy’s debt-to-GDP has been above 100 per cent for at least two decades and no one seemed to care. Other countries in no better shape have far lower bond yields. If you want to see a miniature economic horror show in the making, look at Belgium, which has no official government, is on the verge of splitting in half, has a higher deficit that Italy’s and a debt load not much lower. Yet its bonds trade at a 4.4-per-cent yield, or more than two full percentage points less than Italy’s. Go figure.
So what really triggered the Italian bond yield horror show? Blame politics. Mr. Berlusconi was seen as part of the debt crisis problem, not the solution by the northern countries. When the recession started after the Lehman Bros. collapse in 2008, he denied Italy was in trouble. Later, when Germany and France demanded austerity programs, he at first balked, then begrudgingly agreed to put them in place, though not at the level deemed sufficient by Germany, the euro zone’s paymaster.
He ensured his own destruction when, in July, he turned on his own finance minister, Giulio Tremonti, whose desire to ramp up the austerity measures went beyond the prime minister’s comfort levels.
But maybe Mr. Berlusconi wasn’t in denial, distracted or just plain lazy. Maybe he didn’t want to take Italy down the road to German serfdom by subjecting the country to the same sort of austerity programs that are killing the Greek economy and severely damaging Spain, Portugal, Ireland and Britain. Indeed, the whole thinking on austerity is changing. Deep spending cuts are translating into deep reductions in growth, intensifying the debt crisis. Even Canada has delayed plans to balance its budget.
Silvio is gone and tarnished. But who can say he did a worse job at managing the debt crisis than anyone else in the sorry euro zone?