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Today in Euromess: Will Silvio go?

at 03:55 PM ET, 11/08/2011


Italian prime minister Silvio Berlusconi said Tuesday that he will resign. (Antonio Calanni - AP)
Italian prime minister Silvio Berlusconi announced Tuesday that he will resign after the country passes a budget. Greece wants to form a unity government after its own prime minister, George Papandreou, announced this week that he would leave office. But that nation — facing a debt crisis --is struggling with political roadblocks. The Euromess used to be seen as a fairly straightforward economic problem. Now it’s mutated into a political problem, too.

And that’s likely to make matters much worse for the region that shares the euro currency. A 2009 working paper from the International Monetary Fund found that short-term political instability “significantly reduces economic growth, both statistically and economically.” More from IMF’s Ari Aisen, the paper’s author:

By increasing uncertainty about the future, [political instability] may lead to less efficient resource allocation. Additionally, it may reduce research and development efforts by firms and governments, leading to slower technological progress. Violence, civil unrest, and strikes, can also interfere with the normal operation of firms and markets, reduce hours worked, and even lead to the destruction of some installed productive capacity. Thus, we hypothesize that higher political instability is associated with lower productivity growth. Finally, human capital accumulation may also be adversely affected by political instability because uncertainty about the future may induce people to invest less in education.

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