There has never been such rejoicing at the resignation of a post-war Prime Minster as was on display yesterday in the streets of Rome: music, popped champagne and dancing in the streets, and much talk of a page being turned in Italian history. This, however, remains to be seen. Berlusconi has already vowed to fight back, lashing out at those who ‘betrayed’ him, attempting to extract crucial concessions on media and electoral legislation, and even stating bluntly “we can pull the plug on this government whenever we want.” Silvio Berlusconi’s resignation is not the end, but the beginning of Italy’s daunting economic and political struggle.
The task facing Italy is nothing short of Herculean. From abroad, since the introduction of the Euro, one receives the impression that aside from the occasional ‘colourful’ story about Italian politicians, Italy had turned a leaf of fiscal – if not moral – probity. Unfortunately, in reality, the particularly toxic mix of politicians, business and organised crime uncovered in the ‘Bribesville’ scandal has festered ever since the fall of the so-called ‘First Republic’. Indeed, the parallels between Italy’s longest-serving Prime Minister of the republican era, Berlusconi, and his early political patron, Bettino Craxi, the country’s second-longest-serving post-war prime minister, are striking. Like his protégé, Craxi was forced to resign as a result of the ‘Bribesville’ scandal, dire economic performance, and the ensuing tidal wave of disgust that swept through the country in 1992-93.
Under their leadership, the country’s economic and political wobbles during the previous decade have turned a quagmire: Italy’s political class is again broadly discredited, and its economy lies in tatters. The economy has grabbed recent headlines, but what got the country into its present mess was its politics.
From Euro to Zero
The numbers of Italy’s economic woes under this leadership are sobering. Having at one point been the fourth largest economy in the world, Italy’s average growth over the past decade has been the lowest in the Eurozone. In 2009, GDP dropped by 5.2%. In 2010, its 0.8% growth placed Italy close to the bottom of global growth rankings, just above Zimbabwe and Haiti.
Debt went from around 60% in 1980, to 70% by 1983, 92% in 1987, reaching 118% in 1992 – not least as a result of the increasing corruption revealed by the ‘Bribesville’ scandal which brought down Berlusconi’s patron Craxi – only to be brought down to about 106% in 2008. Under Berlusconi’s latest government, debt leapt to just under 120% of GDP, second-worst in the EU. Nor do other economic data provide solace. Unemployment has increased by over 1.5% to an 8.4% average since 2009. But this average not only masks unemployment among the young at 29.3% (in parts of the South, it’s close to 40%) and among women at a staggering 46%, but even in traditionally prosperous areas of the North unemployment rates have doubled in some places. Inflation has more than doubled over the past year, jumping to 3%, and recent ILO figures put the drop in wages’ real purchasing power at -13% over the past two decades.
In case anyone doubted the seriousness of Italy’s economic situation, with or without market speculation, Italy already passed two budgets already this year, before the final ‘stability pact’: the first budget was worth around €25bn, the second was worth €54bn, and the latest bill was worth an estimated €84bn. To put things into perspective, last year’s budget, in itself considered extraordinary, was worth €27bn.
But what is even more staggering – or ought to be – is the vast uncollected revenues the Italian state forgoes every year, and about which little or no discussion has taken place. In Italy, tax fraud, mostly concentrated in the North and Centre, alone is worth over €120bn, over five times the 2010 budget. Fraud is concentrated in the construction and service sectors, with professionals estimated to evade around 33% of their taxes, while entrepreneurs evade between 50% and 60%. Even more seriously, the likelihood of having to pay when committing such fraud is approximately 0,00016%, or one in ten thousand. Then-head of the Bank of Italy Mario Draghi, now newly appointed Head of the European Central Bank, called tax evasion “social butchery,” pointing out that it shifted the burden of payment onto the poorer and weaker sections of society, polarizing the increasing gap between rich and poor.
Aside from tax fraud, there are other notable pots of money the Italian state fails to tap into: state-to-private corruption – i.e. excluding private corruption – is estimated at €60-100bn a year, for example, while organized crime is estimated to be worth about €150bn. Another controversial flow of money comes from repatriation of funds on which tax is due but stashed abroad, estimated to be worth about €160bn, or 10% of GDP – proportionally roughly the same size as the entire financial sector in the UK economy. Berlusconi, himself implicated in ‘hiding’ profits in this way, passed a law which made it extremely easy and cheap for such funds to be repatriated, by paying 5% of these to banks, who would then relay them to the government. By contrast, in the UK and the US it costs about 50% to repatriate such funds. The penalty for such fraud is so low it has been said to undercut the rates charged by organized crime.
In total, these funds are worth around €440bn per year, the same size as the EU’s first Financial Stability Fund (EFSF), and considerably larger than the combined worth of the top seven items in Italy’s national budget: health (105bn), state bureaucracy (103bn), education (57bn), welfare (34bn), transport (33bn), defense (18bn) and security (13bn). Certainly, it is unrealistic to think that some of these funds are easily available – organized crime, for example, is notoriously intractable (although it would certainly help if ministers and party members in the Berlusconi government were not indicted or sentenced for mafia-related crimes). However, if the Italian state were capable of retrieving merely 10% of evaded taxation, its normal budgetary requirements would be halved at a stroke. It certainly puts into perspective the notion that privatizing €15bn in state assets, as the recently approved ‘stability pact’ does, is a sound long-term strategy.
It is difficult to over-emphasize just how serious Italy’s economic situation is. It is also difficult to explain to those outside Italy just how strongly he is opposed right across Italian society. The opposition from the Left might be taken for granted, but it was not a leader of Italy’s notoriously ineffective Democratic Party who recently quipped “Italy is a serious country, we’re sick of being an international laughingstock”, but rather Emma Marcegaglia, president of Italy’s powerful confederation of Italian industrialists. And Ms Marcegaglia is far from alone: according to recent polls, the vast majority of Italians would agree with her.
Comments like these from such quarters emphasize the degree to which the political class has managed to insulate itself from the pressures of either citizens or powerful elites. Already in 1981, Enrico Berlinguer, then leader of the Italian Communist Party, pointed to what is probably Italy’s greatest ill, and the reason why Craxi and Berlusconi managed to remain in power for so long despite popular pressure. He argued that parties had gone from being vehicles of popular sentiment, to “machines of power and clientelism” which colonised the state. Ten years later, the Bribesville scandal hit Italy. Today, its descendant, as yet unnamed, reveals an even more pervasive and toxic mix of corruption spanning politicians, businesses and organised crime. It is this particular mix, this system of power, which kept Berlusconi afloat, above and beyond any popular political consensus he may have had. This system relies on clientelistic – often nepotistic – ways of managing public affairs combined with electoral legislation which makes it practically impossible for citizens to vote leaders out of office. Berlusconi is the archetypical expression of this system: unlike Craxi, he is not just a political leader, but is independently capable of conferring patronage, and has a virtual stranglehold on the country’s media. So far removed are Berlusconi’s politics from liberalism that The Economist, the Financial Times and the Wall Street Journal all recently labelled Berlusconi a “plutocrat.”
The result is that, as Guido Montedo recently put it shortly before Berlusconi was forced to resign, “today only Berlusconi can defeat Berlusconi … he has tried very hard, but to date he has not yet succeeded”. The effects of this system are readily discernible: not only has public spending shot out of control, with the debt/GDP ratio jumping 15% in two years back to ‘Bribesville’ levels, but over 80 members of parliament – i.e. over 10% from both chambers – under currently investigation, awaiting trial or convicted. Nor is this a phenomenon limited to Berlusconi’s supporters alone: over 30 such MPs, for example, are in not from his party.
Perhaps the best example of this – and, abroad, certainly the most shocking – was the ignominious spectacle of vital matters being put on hold, from the appointment of a replacement Bank of Italy chief to an emergency budget intended to assuage the international money markets, while Berlusconi and his allies haggled over appointments and other concessions. In a shocking piece of political theatre between tragedy and farce, while Rome was burning – during that week alone, Italy’s total debt shot up from an already staggering €1.9tn, to €2.3tn – Berlusconi was playing the lyre of his financial, political and judicial interests. It took the concerted efforts of France, Germany, the US and international financial institutions from the ECB to the IMF to force him from office.
But it would be a mistake to see his weakness as undesirable to his ‘allies’. On the contrary, this enabled them to extract further patronage in order to secure their support. Beyond his own party and the ‘Group of the Responsible’ whose support Berlusconi effectively bought in order to survive last December’s confidence vote, this patrimonial brinkmanship was most evident within the Lega Nord, with its leader, Umberto Bossi, effectively holding Berlusconi to ransom on a whole range of issues.
Just how far this patronage politics was being stretched can be seen in the fact that despite this perfect storm of internal popular and elite opposition combined with international pressure, a mere eight Deputies out of 316 were prepared to abstain from voting in favour of the budget last week. Indeed, while inflation returns, unemployment soars, debt skyrockets and repeated calls for ‘austerity’, ‘sharing the pain’, ‘tightening the belt’ etc. translate into all sorts of cutbacks hit the working and – increasingly – middle classes, Italian MPs earn an average of €14,000 a month, and ten days ago saw fit to reverse a mere 5% cut on salaries above €90,000.
Nor has the damage which has been done to Italy been merely economic. Roughly correlating to Berlusconi’s tenures in government, Italy’s media has been downgraded by Freedom House to ‘Partly Free’ (Western Europe’s lowest ranking); it has slipped down the Corruption Perception Index from 31st when he came into government for the second time, to 67th after two years of his third term, and currently ranks 74th for gender equality.
Faced with all this, it is no wonder that many Italians speak of an imbarbarimento (descending into barbarism) of Italian politics, but also of the country in general. Ultimately, Italy’s challenge is not merely to balance its books, but to address the system of patronage and clientelism which had caused this latest crisis.
He’ll Be Back
The plain fact is that Berlusconi is still the most powerful man in Italy: he controls television and vast swathes of the printed media, his powers of patronage remain unrivaled despite the hit shares in Mediaset have taken over the past few days, and if initial reports are accurate, he has already obtained guarantees from newly-appointed Prime Minister Mario Monti that neither the infamous electoral law which allowed him to regain power nor the telecommunications law which guarantees his media monopoly will be altered. Berlusconi retains a clear majority in the Senate, which is necessary to pass any bill, and has already stated unambiguously that he is in a position to “pull the plug at any time” on the new government. He has committed publicly to returning to government, and every indication available so far is that he considers this a temporary setback.
The picture is not that of a man defeated, humiliated and sapped of the will to continue, but on the contrary one of a leader mustering forces for a fightback. This should not come as a surprise, as the fundamental reasons for which Berlusconi entered politics in the first place have not changed: his political activity puts him in an ideal position to defend his economic interests in Italy, and he is still under investigation and currently being tried for a variety of crimes, from the headline-grabbing payment for sex with a minor, to corruption, to less commented but extremely serious allegations of collaboration with the Palermitan mafia. Finally, while many rightly argue that Italy’s financial vulnerability makes it difficult to hold immediate elections, his role in ‘opposition’ will allow Berlusconi time to mount an electoral campaign in the media he so tightly controls, and if necessary use his patronage to buy back the support of Deputies, including those who ‘betrayed’ him.
The likelihood of his return is strong. After all, despite the dire confluence of personal, political and economic scandal as well as unprecedented pressure from both national groups – including the powerful confederation of Italian Industry – and from international bodies form the EU to the IMF, a mere eight Deputies were prepared to refrain from supporting him in parliament. Any analysis of ‘post-Berlusconi’ Italy ought to be conducted in the light of this sobering fact. And while Italy’s ‘international partners’ will be satisfied by a balanced budget regardless of who pays for it or of whether genuine reform takes place, increasingly dissatisfied citizens look likely to remain voiceless, particularly since Berlusconi’s opponents look as toothless and complicit in his type of politics as they ever have.
Berlusconi has been ousted from his seat of power. But prospects for genuine reform which guarantee growth and social justice, and which do away for the clientelistic politics which got Italy in this mess to start with look grim indeed.
On the day of his resignation, many in Italy held up signs "game over for Berlusconi". On the contrary, this is where the game begins: he has a majority in the Senate, plenty of time to buy off Deputies, he has apparently extracted guarantees from incoming Prime Minister Mario Monti that election and telecoms laws remain as they are, and a ready-made story about his ‘betrayal’ just as he was about to fix ‘Italy’. Sure, Italians heard this story before, but that hasn’t stopped him from being re-elected in the past.