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The Globe and Mail

The zombie act that has Italy in its sights

With his slicked-back hair, pancake face apparently awash in Botox and perma-grin, Silvio Berlusconi cuts a surreal figure on the campaign circuit, a "dwarf zombie," to use the impolite description of Beppe Grillo, one of his political opponents.

But as far as zombies go, there is no doubt that Mr. Berlusconi, Italy's three-time prime minister who is fighting his sixth – and last – campaign, is somewhat bouncier than most. The great showman, who is 76 and engaged to a woman 49 years younger, is dominating television and radio channels (many of which he owns) and charming his way back into the imagination of Italians. When technocrat Prime Minister Mario Monti called him a Pied Piper tricking Italians, he quipped that Mr. Monti would tax his flute.

The result is the man who is blamed for taking Italy to the verge of Greece status during the height of the euro crisis in 2011 is surging in opinion polls, after being written off for dead.

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The latest poll puts his centre-right coalition at 28.7 per cent. That's only five points less than the 33.6 per cent of the centre-left coalition, led by ex-communist Pier Luigi Bersani. In third spot is the Five Start Movement (M5S) led by Mr. Grillo, the comedian turned anti-corruption activist whose party placed first in the recent Sicilian election. Dead last is none of than Mr. Monti, who replaced Mr. Berlusconi 15 months ago. The election is set for Feb. 24 and Feb. 25. With so little time left, only a miracle would save Mr. Monti's fortunes.

Mr. Monti is loved by German Chancellor Angela Merkel and other European leaders for having yanked Italy back from the crisis cliff, but is unloved at home. He is a stiff and awkward campaigner – this is the former European commissioner's first run at elected office – and the real estate tax he introduced as the centrepiece of his austerity campaign is despised by Italians. Taxes kill votes; Mr. Berlusconi's anti-tax, anti-austerity, anti-Germany message is working its magic.

Mr. Berlusconi's rise is bad news for Italy's recovery. There is an off chance he could become prime minister again, though the numbers say Mr. Bersani and his Democrats will probably win parliament's lower house, the chamber of deputies. But Mr. Bersani might be denied a majority in the senate. Both houses rank equally; winning one but not the other means you can't govern.

With Mr. Berlusconi coming on strong, Mr. Grillo's M5S polling respectably well and Mr. Monti going nowhere, a hung parliament is a distinct possibility. That, too, would be bad news for Italy, since it would stall the economic reform program and trigger a second round of elections. If there is a European country that needs a stable government, it is Italy, which is big enough to wreck the whole European show. Its economy is a quarter bigger than Canada's and only slightly smaller than Britain's.

The European Union and the 17-country euro zone within it are on the mend, albeit slowly. Sovereign bond yields have plummeted since last summer, when European Central Bank president Mario Draghi pledged to buy the debt, in unlimited amounts, of any euro-zone country that found itself struggling to raise money. The program has yet to be triggered, but its mere presence has sent the bond short-sellers fleeing.

While Italian bond yields are much lower than they were in 2011 – the spread between Italian and German bonds has about halved to 2.6 percentage points – Italians are dreaming if they think the crisis could not coming roaring back. Almost every piece of economic and financial data is going in the wrong direction. The economy probably shrank 2.3 per cent last year and will remain in recession this year. Citigroup does not expect Italy to return to growth until 2017.

Italian industrial production is down by 25 per cent since 2008, according to a January report from National Bank Financial, and productivity is not improving. Labour costs have not fallen since 2009, meaning manufacturing jobs are likely to keep vanishing as profit margins are squeezed (Fiat is losing a fortune in Italy and just eliminated its dividend). Unemployment is 11.1 per cent, the youth jobless rate is 37 per cent. Save for Greece, Italy also has the highest debt-to-gross domestic product ratio, at 125 per cent, in Europe.

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In this sense, the Italian election matters more than any election in Europe this year. If Mr. Berlusconi is re-elected, or the election proves inconclusive thanks to him, creating a power vacuum, all bets are off for Italy's touted recovery. The bond maulers are gone for the moment. They could easily return if the ex-communist, the technocrat and the comedian fail to stop Mr. Berlusconi's zombie-resurrection act.

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