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It’s still Italy, stupid

28 October 2011 By Hugo Dixon

Amidst the post-euro summit euphoria, it’s easy to ignore that cracks have only been papered over in Rome. Not only do Silvio Berlusconi’s reform promises not go far enough; there’s a risk that his government will limp on until January, and then collapse having achieved nothing.

Following the first of two euro zone summits over the past week, Berlusconi seemed in an impossible spot. The prime minister’s fellow leaders – Angela Merkel and Nicolas Sarkozy – pressurised him to step up Italy’s plan to boost growth and cut debt. However, when he got back home he found that his main coalition partner, the Northern League, was unwilling to back the most radical idea for reform: cutting the generosity of a state pension scheme that allows people to retire after 40 years work.

But Berlusconi is a master of survival. He cobbled together a package that wasn’t so radical to cause the immediate collapse of his government, but just strong enough for his euro zone partners to suspend their disbelief. Two good new proposals attack Italy’s virtual jobs-for-life system: one to make it easier to lay off workers in the private sector; and another that could potentially lead to civil servant layoffs too. Still, Berlusconi ducked the pension issue and came up with little to cut the state’s debts which are about 120 percent of GDP.

The biggest worry, though, is that Berlusconi’s centre-right coalition is so fragile that he will not be able to implement what he has promised. Given the way Italian parliamentary procedures work, this will probably not be tested until January. If Berlusconi loses a vote of confidence then, new elections would probably be held in March. After that, there could be weeks of wrangling as different parties of the right, left and centre jockey for power. There’s no guarantee that the government that emerged would be willing to implement even Berlusconi’s inadequate programme.

Europe bought itself time this week to sort out its problems. The biggest risk to the whole region is that Italy could gobble up this time and have nothing to show for it.

 

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