The €20 billion “Berlusconi tax”

at 12:37 PM ET, 11/07/2011

Earlier this morning, financial markets perked up over rumors that Italian Premier Silvio Berlusconi might soon resign. Stocks rose briefly, and Italy’s borrowing costs eased. But then Berlusconi huffed that he wasn’t going anywhere and markets got depressed again. So what gives? Do the markets really think Berlusconi is that big a drag on Italy?

(Max Rossi/Reuters)
Actually, yes. Tito Boeri, an economist at the University of Bocconi in Milan, devised a clever way of showing just how much Berlusconi’s antics are weighing Italy down. Boeri compared the borrowing costs of both Spain and Italy — two countries in similar predicaments since Europe’s debt crisis began — by looking at their bond spreads vis-à-vis German bonds. Boeri found that Italy’s position relative to Spain has noticeably worsened every time new Berlusconi-related scandals have emerged. What’s more, Berlusconi’s announcement of a new budget package on Aug. 8 had no effect on Italy’s standing — suggesting that the prime minister no longer has any credibility with the markets.

All told, Boeri concluded, by driving up the country’s borrowing costs far above even Spain’s, Berlusconi’s government has imposed a €20 billion “tax” on Italy through mismanagement alone.

“Time is running out,” Boeri told me in an interview, “but the situation can still improve.” Among economists, he noted, there’s no shortage of ideas on how Italy could shore up its finances and placate markets. For one, the country could crack down on rampant tax evasion to raise revenue. And the government will likely need to rein in its pension costs. As Boeri points out, Italy has one of the most generous retirement progams in Europe, with the lowest rate of labor-force participation among workers over the age of 55. But at this point few people believe Berlusconi can enact any truly meaningful changes.

Meanwhile, other experts note that a Berlusconi exit, while necessary, won’t be sufficient to turn Italy around. The University of Bologna’s Paolo Manasse argues that if Berlusconi is succeeded by one of his protégés, little will change. A better alternative, he says, is a coalition “caretaker” government led by economist Mario Monti that can push sweeping (and difficult) fiscal measures through parliament. At the moment, though, quite a bit still rests in Berlusconi’s hands.

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