Associated Press, Milan | Mon, 11/07/2011 9:04 AM
The Dolce Vita lasted for a long time in Italy, but now it's back to reality.
Postwar prosperity allowed hundreds of thousands of workers to retire with full benefits before the age of 50. Public spending ran over, creating bloated bureaucracies and a political class that consume half of the national wealth generated each year. Easygoing Italians, expecting little from the state, rarely think twice about paying under the table for home improvements, dental work or even a frothy cappuccino.
But the bill for decades of excess is coming due, and the price to escape Europe's sovereign debt crisis is steeper than many feared.
Premier Silvio Berlusconi, the tenacious leader who has survived sex scandals and multiple criminal prosecutions to head three governments since 1994, is losing his grip on power and lacks the political muscle to push through change.
During an economic summit in France, he asked the International Monetary Fund to monitor the country's reform efforts, a humiliating development for the world's seventh largest economy.
The deepening crisis has already shaken three governments - in Ireland, Portugal and Spain, where early elections are scheduled in two weeks - and Greece's Socialist-led government is struggling to form a unity government after narrowly surviving a confidence vote. Many thank Italy will be next.
"Berlusconi's time is up," Ferruccio de Bortoli, editor of the leading Italian daily Corriere della Sera, wrote this week. "He risks bringing down his party - which should push him to leave - and above all the whole country."
The government's turmoil reflects a deepening unease about the financial uncertainty that is gathering over the country.
Italians, still hurting from the 2008 financial crisis that slowed factories and idled workers, are paying with continued economic turmoil and austerity moves that are hurting consumer confidence. And the broader fear is that Italy, if it faces default on its enormous (euro) 1.9 trillion ($2.62 trillion) debt, would drag down the eurozone, if not the global economy.
"We, the young ones that pay the highest price, we are the ones who are paying for the crisis," said Giuseppe Muscanera, a teacher from Bologna, at an opposition rally in Rome on Saturday demanding Berlusconi's ouster.
"We can start rebuilding through a serious governing class, with ideas, that wants to work," he said.
The ultimate fear is that Italy might need to ask for a bailout to handle its enormous (euro) 1.9 trillion ($2.6 trillion) debt load. That would be simply too expensive for the eurozone, and could trigger a default that would break up the currency zone and drag down the global economy.
For at least a decade, Italy has been getting by with high public debt and low growth without setting off major warning bells. Unlike their government, Italian households save lot and a majority own their own homes. That insulated the country from the real estate crashes and private debt crises that hit other economies, like Spain, so hard in 2008.
Unlike many eurozone countries - even rich and stable Germany - Italy did not have to bail out its banks during the 2008 global credit crunch because they had avoided excessive risk-taking.
But the past two years' sovereign debt crisis has changed all that. After Europe was forced to bail out Greece, Ireland and Portugal, investors reviewed their assumptions about how risky government bonds in Europe were. Fearing the worst, many traders started selling their Spanish or Italian bonds in favor of the safer ones, mainly from Germany.
Some economists have blamed Europe's slow and indecisive handling of the debt crisis for allowing investors' concerns about bigger economies to grow.
The possibility that Italy may need a bailout rises each time its borrowing costs go up. Borrowing rates on 10-year bonds reached a euro-era high of over 6 percent last week. Italy's new chief central banker Ignazio Visco insists Italy can survive with rates of up to 8 percent, but the extra cost of borrowing is eroding the savings the government gleans from its austerity measures That sort of downward spiral is what has pushed Greece to need multiple bailouts.
Mario Draghi, an Italian who just took over as European Central Bank president, said this week that since joining the euro, Italy had enjoyed unnaturally low interest rates because its monetary policy was linked to that of stronger economies like Germany.
"For a long time spreads between sovereign bonds in the euro area were very narrow. In point of fact, they did not reflect the different realities of different countries," Draghi told a news conference after his inaugural ECB meeting.
Draghi suggested it was normal that a country like Italy should have higher borrowing costs than Germany. In fact, enjoying low rates had allowed the Italian government to avoid the tough growth-boosting reforms that it needed. Now that they are higher, Rome is scrambling to agree on reforms.
To avert default, Berlusconi's increasingly fractious governing coalition is under intense international pressure to approve and implement measures to balance the budget and spur growth - the only sure way to bring down national public debt. But infighting has been hindering those efforts
In Italy, politicians have bristled at suggestions that Italy has given up its sovereignty. For the opposition, it has become another barb against Berlusconi: He's not up to the job. But economists, ordinary Italians and even the respected octogenarian president have to some degree welcomed the outside intervention - seeing it as both a safeguard and a reasonable trade-off for membership in the European Union, and the euro.
After failing to come up with emergency measures that would take immediate effect this week, Berlusconi proposed legislation that he promises to put to a confidence vote within two weeks. If he loses, he must step down.
The new measures include a plan to sell government assets, which is expected to raise (euro) 5 billion a year over the next three years; and tax breaks to encourage employment for the young and to get women back into the work force in a country where youth unemployment is running at 29 percent and just 48 percent of women have jobs. The legislation would also allow stores to stay open on Sundays and open up closed professions.
Berlusconi has also pledged to raise the retirement age to 67 for all classes of workers, to match European trends, despite the fierce resistance of his allies the Northern League.
Among the measures still missing, but on international watchers' wish lists, are labor market reforms and reducing political costs.
The way forward is uncertain, however, as entrenched interests make change difficult in Italy.
Union workers have protests against the government plan to loosen the labor law so that businesses can more easily fire unproductive workers.
Even before the confidence vote, Berlusconi will face another test when parliament for a second time considers approval of government accounts. Normally a formality, the accounts failed by one vote last month. A second failure would further damage Berlusconi's government, perhaps fatally.
Already, loyal members of his People of Liberty Party have been defecting to the opposition, and urging him to form a broader government that would be able to comfortably push through reforms - and avoid early elections.
Italy's President Giorgio Napolitano, who would be in charge of choosing an interim government if Berlusconi's collapses, has been meeting with party leaders to size up alternatives. But he has said he won't act until he sees how the majority lines up in parliament.
Not even allies are optimistic.
"I don't know how many days or weeks this government has. It's certain that a majority that manages with few votes can't continue for long," said Guido Crosetto, a lawmaker in Berlusconi's party.
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