The escalating turmoil in Italy highlights the repeated failures of European leaders to come to grips with the debt crisis, which has been building over the past two years.
Officials had hoped that the markets would calm after politicians in near-bankrupt Greece rallied around a plan last week that would bring sharp austerity in exchange for a bailout. But investors — now fretting over Italy and doubting whether European leaders can muster the will to truly resolve the crisis — instead appear as skeptical as ever that highly indebted European countries will be able to pay their bills.
Should Italy, which has amassed more than $2.6 trillion in debt, fail to quell the rapid escalation of borrowing costs, the impact could greatly worsen the already bleak outlook for the global economy. Italy’s bonds are among the most widely held in the world. Any hint that they might not be worth their promised value could shatter confidence in the ability of other indebted governments, particularly in Europe, to make good on their obligations.
On Monday, Italy’s fate seemed increasingly tied to that of Berlusconi, a wily 75-year-old politician who, in his opera-plot-like tenure, has survived scandals from allegations that he hosted sex parties to accusations of corruption.
With his fragile leadership now seen as one of the biggest obstacles to passage and implementation of a critical reform package, reports that he might be preparing to resign Monday sparked a sudden turnaround rally in Italian stocks and bonds. The market optimism faded, however, after the prime minister posted an official denial on his Facebook page.
Nevertheless, calls for Berlusconi’s resignation are intensifying dramatically, with rebels defecting from his party and some of his closest allies advising him to step down for the good of the nation. Berlusconi on Monday signaled that he was ready for a fight, telling the Libero newspaper that he would call a no-confidence vote himself. “I want to look the traitors in the face,” he said, referring to the longtime allies who are fleeing his side.
Berlusconi faces a crucial test in Parliament on Tuesday, with a budget vote that analysts say could underscore just how much support he has lost within his party.
A larger rescue fund
Italy’s sheer size — its economy is bigger than Russia’s or India’s — would test the resources of euro-zone nations and the International Monetary Fund to come up with a bailout large enough to prevent a financial fall of Rome.
Sensing the urgency, finance ministers from the 17 nations that share the euro vowed on Monday to hash out the details of an expanded rescue fund within weeks, even as analysts suggested that the effort could fall far short of the region’s growing need.
Unlike Greece, Italy has a huge industrial base. But its economy has wallowed in low-to-zero growth for years, while piling up a huge level of public debt equal to 120 percent of the national economy — far more than other indebted nations, including the United States and Britain.
Perhaps even more than in Greece, where Prime Minister George Papandreou is being forced to resign as part of a bid to create a new unity government, the problems in Italy are very much political. The question is whether Berlusconi still has the political mandate to force through deeply controversial measures meant to stimulate growth and regain international confidence, or whether he will be forced out, like Papandreou, leaving the stewardship of Italy in question at a pivotal time.
“My perception is that this is an endgame; Berlusconi’s political cycle appears to be over,” Giuliano Amato, a former two-time Italian prime minister, said in an interview Monday. “The question I always get from my American friends is, how is it possible that Italians are willing to keep accepting this man? I had to answer this question time and time again. But now, I feel this question is over.”
Renowned for courting scandal and somehow escaping — he once defended allegations of affairs with women by saying that at least he wasn’t gay — Berlusconi in recent days has charted new territory by seeming to undermine something this storied country was founded on: pride.
Italians were aghast as German Chancellor Angela Merkel and French President Nicolas Sarkozy broke protocol by smirking and rolling their eyes when asked about Berlusconi last month.
And during last week’s summit of world leaders in Cannes, France, Berlusconi was effectively forced to agree to foreign economic oversight, with a team from the European Union dispatched to Rome to double-check Italy’s progress on spending cuts, like a teacher watching over a recalcitrant child.
Full restaurants, no crisis?
At a recent news conference in France, Berlusconi appeared out of touch with the reality in his nation. He suggested that the mounting attacks on Italian bonds were nothing more than a “passing fashion,” and he insisted that the nation could not truly be in crisis as long as its restaurants remained crowded with diners.
Berlusconi, a political Houdini, may again manage to survive, as he has countless times before. Italy’s opposition appeared to be weighing whether to force a no-confidence vote this week. If they opt for restraint, the prime minister has said that he will call such a vote on Nov. 18, when Parliament is set to consider a promised set of economic reforms.
But many here see a script being written that, in the coming days or weeks, could become Berlusconi’s final act. Some are calling for a transitional government of technocrats, effectively sidestepping Italy’s notoriously divisive political class.
Santo Versace, brother of the late fashion designer Gianni Versace and a lawmaker who recently left the governing party, said he broke with Berlusconi for three reasons: “He didn’t deal with the economic crisis, denying at first that it even existed in Italy. Secondly, for failing to do anything about corruption, and thirdly because he has reduced Italy to a laughingstock in the world,” Versace said. “The whole world laughs at Italy. And we don’t deserve it.”
Special correspondent Sarah Delaney in Rome contributed to this report.