After an uncertain election in February rocked the boat off-course, Italy finally appears to be on the path to economic recovery under the leadership of Enrico Letta’s centre-left Democratic Party, in coalition with Silvio Berlusconi’s right wing People of Freedom (PdL). However, Letta is dealing with the devil in former President and notorious playboy Berlusconi: while trying to finally form a government, he may have compromised the long-term political prosperity of his party and the economic prosperity of Italy.
Letta’s predecessor at the head of the Democratic Party was veteran political moderate Luigi Bersani – an unexciting but earnest opponent to the abhorrent corruption in Rome. Despite winning February’s federal election, Bersani failed to capture the majority of the Senate, and was thus forced to negotiate with his political rivals in order to form a government. A surprisingly principled politician, Bersani refused to even try negotiating with the Berlusconi regime because Italy’s economic cataclysm occurred as a result of Berlusconi policies, corruption, and apathy. This principled stand proved to be Bersani’s undoing, as other political parties were unwilling to negotiate the terms of a coalition, which ultimately lead to his resignation. Once Enrico Letta assumed the vacant leadership position, he learned that he must be willing to form a coalition with PdL, or else risk political suicide.
Relieved that Italy had at last formed a government, the markets responded very positively to this new political leadership. Italy’s shrinking borrowing costs sent a strong message to investors, and the lower bond yields mean that the less debt-ridden banks in the country are finally able to ease their strict borrowing policies. At last, Italy’s budget deficit to GDP ratio has fallen below the European Union’s ‘Maastricht Ceiling’, a measure which dictates that the annual budget deficit of a country as a percentage of the GDP must be below 3%. As a result, the European Commission has recommended for Italy to be removed from the list of nations with excessive deficit whose public accounts need drastic restructuring.
While all of this certainly indicates that Italy is on a solid path towards economic recovery, a close inspection of the political climate suggests that longer-term turmoil is looming. Letta survived his first major test as leader in the municipal elections, which on their own gave confidence to the Democratic Party; however polls indicate that the right wing PdL party of Silvio Berlusconi is beginning to gain momentum ,while Letta’s Democratic Party have bled at least 250,000 voters in the past 5 years. Whatever else one may say about him, Berlusconi is a savvy politician with a keen ear towards the electorate’s mood, and he will not hesitate to disassemble the coalition when he feels that his party can reclaim victory.
However, as it stands now Berlusconi is achieving many of his policy goals through his partnership with Enrico Letta. In order to form a government, Letta’s centre-left moderates were forced to adopt a few right-wing policies such as social program cuts, and abolish a much maligned housing tax. While these measures are popular, they could ultimately spell trouble for Italy’s long-term economic sustainability: 7-10 billion Euros will be needed to finance Berlusconi’s housing tax abolition alone, and it is still unclear where that money will come from.
Enrico Letta’s victory has come at a great political and economic cost. His party’s immediate political future is contingent on finding a way to regain enough popularity to form a government without colluding with the disgraced, corrupt, and self-serving Silvio Berlusconi, and without seeing their economic policies become further distorted by those of the right wing.
– Eli Vincent Zivot
Photo Credits: Flickr, European Parliament