The Italian Government between an Irresistible Force and an Immoveable Object.

Or put more simply, Berlusconi is still between a rock and a hard place. After all the hype over the last week about “last chance for the euro”, for Europe, for Berlusconi and his government and the apparent solution, what has actually happened? Here in Rome or in Brussels, Paris and Berlin?

This time there is a real risk of the government falling from the pressure of the European institutions and internally from doubting allies. The fall has been predicted so many times that I might be crying wolf but this is the most serious so far. Berlusconi once again told the world that his government is solid until the end of its 2013 mandate immediately after the all-night session with euro member heads of government and has repeated the mantra since coming back. It is just… just, possible that he will make it – Berlusconi is one of the world’s most stubborn politicians able to resist multiple storms but the odds of his making it to 2013 lengthen by the day.

The irresistible force is the European Commission and Council which gave Berlusconi clear orders to take immediate action to reform the Italian economy; the immoveable object is Umberto Bossi and the Northern League who refuse to accept any radical changes to Italian pensions.

Early Thursday morning, the European institutions accepted Italian government reform plans avoiding an immediate crisis; now the ball is back in the Italian court. Very little of the plan to the EU that is actually new – the proposal to raise pension ages to 67 by 2026 became law earlier this year or can be guaranteed to raise real income in the coming year – selling off public property is a risky business especially in a country where real transparency in public accounting is still a long way off and which in any case has little money; and nabbing tax evaders is a great idea but but not something that can be banked on in next year’s budget. Changing the law to make it easier to lay off and fire workers has already brought a reaction from the unions with demonstrations in Rome on Friday.

The first market reactions on Thursday were positive both on the Italian plan and the broader plan to support the euro and European banks. But on Friday the Milan stock market took the heaviest losses on the continent and Italy had to offer more than 6% on its 10 year bonds, the highest ever.

It was a very short relief period. Berlusconi is once again out of control verbally denigrating the euro at the same time as the EU and ECB are supporting Italy. He said on Friday that the euro is “a peculiar currency which has convinced no one” only to say he had been misquoted a few hours later. This is hardly the behaviour which inspires confidence. Antonio Politi brought in Aesop’s frog and scorpion story to explain Italy and the EU; the scorpion begs the frog to carry him across the river only to kill him in mid stream, drowning himself. “Why have you poisoned me?” asks the dying frog. “Because it’s my nature” replies the drowning scorpion.

Quoting Aesop ennobles Berlusconi’s incompetence which is muddle rather than tragic destiny. But we get the point.

The only positive result of the Prime Minister’s remarks is today’s reply from Mario Monti where the former European Commission and present president of the Bocconi University analyses the euro’s role and Italy’s need for it and suggests that Berlusconi work to give the euro some binding rules. The letter is respectful and professorial in tone but with little respect in substance; it is another indication that he might be a candidate for prime minister of a technocrat, non-political government. Last week he was the guest on Lilli Gruber’s “Otto e Mezzo” and finessed the question about his candidacy – previously he had kept well out of that possibility. If anyone can show some political leadership combined with skills as an economist sufficient to put Italy back on track, it might just be Monti.

It certainly is not Berlusconi closest ally, Umberto Bossi, the leader of the Northern League. Bossi is fighting hard to prepare his party for elections next year and to maintain his own leadership in the party. He stopped any serious pension reform – the biggest cost of pensions are people who can retire early after a certain number of years of contributions. When the Speaker of the Chamber, Gianfranco Fini reminded viewers that Bossi’s wife had retired at 39, there was a brawl in Parliament between his and Bossi’s supporters the following day. On the same day, the government lost two divisions; these too are not signs that inspire confidence.

On top of it all, the 15 page letter replying to the European Commission and Council Presidents request for an Italian plan was not countersigned by the minister for the Economy, Giulio Tremonti, neither formally nor in any public statement.
Little wonder that both Chancellor Merkel and President Sarkozy showed their scepticism over Italian reliability very visibly last week. Their smirks

were institutionally inappropriate but devastatingly telling. More than anything else the scene shows “sovereign” states are far from sovereign. The smiles also showed that the problem is with the leadership, not with the substance of the Italian economy and finance which are weak but not as catastrophic as market reactions suggest.

The danger is that the government will continue its muddle, not face either Europe or the League by which time we will all be in the middle of the river. The more hopeful scenario is that Berlusconi will have to demand more votes of confidence and Bossi finally pulls the plug…