The End of Berlusconi and the Future of Italy

Why the Solution to Rome's Woes is Simple but Terrible

Italian Prime Minister Silvio Berlusconi is on the way out, the story goes. Come Monday, his center-right coalition, which has dominated Italian politics for nearly 20 years, will be a thing of the past, and Italy will be spared the wrath of the European debt crisis. The opposition thinks it is time to uncork the prosecco. 

But it is not. Italy is far from fixed.

Berlusconi first walked the magnificent halls of the Palazzo Chigi -- the palatial prime minister's residence -- in 1994, when he was a media tycoon, football entrepreneur, a bon vivant, a billionaire, and all of a sudden founder of a political party, Forza Italia. Sophisticated analysts spurned the new party, but for two decades Forza Italia locked in the support of at least a third of the Italian electorate. It won three national elections. And over the years, Berlusconi lined up tens of thousands of political operatives to run the country's major regions and cities, from Lombardy to Sicily and from Milan to Rome.

Voters were captivated by Berlusconi's anti-establishment war cry: "I am a self-made man, not a politician!" They loved his unbridled optimism, his populist style. However, although the prime minister railed against the status quo in his speeches, he failed to reform Italy's stilted economy. He never touched the fat cats -- the tax dodgers, the clubby entrepreneurs who spurned innovation, the class of lobbyists always tied up in shady deals -- or the way they divided public money and assets with little regard for merit and productivity, but instead according to their old web of family and friends. He frequently clashed with the country's powerful unions but never managed to energize the country's sluggish labor market.

Berlusconi's lifestyle was frivolous and excessive. The leftist papers regularly trashed him and his sex parties. (Indeed, it was how the world came to learn the meaning of "bunga bunga.") There were the groupies, the prostitutes, the shiny dancing poles in his villas. The scandals never impressed his supporters, but they did not hurt him, either. At last count, Berlusconi and his staunch ally, Umberto Bossis Northern League, enjoyed 35 percent support in the polls -- not bad after a 20-year run. Even the Catholic Church, while deprecating Berlusconi for his sins, never cut ties with his coalition; dignified Catholic leaders kept serving in the center-right cabinet up to the very end.

What doomed Berlusconi was not The Economist cover that deemed him "unfit" to run Italy. It was not the gaffes, or his screaming at U.S. President Barack Obama, upsetting the queen of England, partying with Libyan leader Muammar al-Qaddafi and Russian Prime Minister Vladimir Putin, and playing peek-a-boo with German Chancellor Angela Merkel.

No, when history judges the lurid Berlusconi saga, bunga bunga will be nothing more than a juicy footnote. After all, the ancient Roman historian Gaius Suetonius Tranquillus enriched his biographies of Julius Caesar with the dirt on sex and the eternal city, but then, as now, the economy trumped the orgies. Berlusconi boasted that he was a man of the market, but it was the market that devoured his party, his coalition, and his cabinet.

Berlusconi's economic faults were legion. He failed to invest in schools, universities, or research, which undercut productivity over time. He shortchanged the technology sector. He never undertook a fair reform of the tax system. He promised more than $1 billion to upgrade broadband but never delivered a cent. Instead, Italy wasted 20 years building up a national debt of $2.6 trillion and nothing else. For nearly all of the last decade, the Italian economy has not grown faster than one percent annually. At this crawling pace, it will take more than a decade to recover just the losses of the financial crisis of 2008. For that, the country needs more babies, an expanding economy, more innovation, more infrastructure, more productivity, more graduates, and more women at work and in the corner office. The challenge ahead is considerable.

At 85, Italian President Giorgio Napolitano is the country's last wise man. He is pushing to install Mario Monti, a respected economist, in Berlusconi's place. That will be no easy feat. Monti has to muster a majority in parliament by bringing over Berlusconi allies, the Catholic moderate center, and the progressive Democratic Party. The radicals -- Northern League and Italy of Values -- will vote against him, because they spurn national unity and thrive on controversies. Their numbers are not enough to stop Monti, but they will wage a guerrilla war against his reforms. Berlusconi will maintain control of at least a robust chunk of his party, and his first move will be to ask his right-hand man, Gianni Letta, a moderate, to serve in the coalition. Giuliano Amato, a socialist and former prime minister, will likely serve as well. Their job will be simple and terrible: to gain back the market's confidence, cut the debt, chase tax dodgers, reduce the excesses of the welfare state, promote innovation, and above all, restore growth. 

When Berlusconi was in office, it was easy for the opposition to blame him for acquiescing to the powerful lobbies and for pampering business cronies. But with him gone, all Italians will have to face the truth. Monti and the new president of the European Central Bank, Mario Draghi, have to rein in the speculators while feeding spoonfuls of bitter medicine to the unruly Italian public. Today, the two are heroes, but tomorrow they will be warriors, clashing against the professional lobbies, the vested interests, and the unions. The country's banks are solvent, its network of entrepreneurs impressive, and Italy is second (after Germany) in manufacturing in the European Union. The country has scores of talented people shining in the global market. Monti and Draghi have reason to be optimistic; this is the opportunity of a lifetime for the two cerebral technocrats. But with almost 45 percent of parliament still answering his call, Berlusconi will be tempted to make mischief.

So Italians now have to write a new page in a very old Italian novel. For nearly two decades, Berlusconi inspired voters with his enthusiasm, but he brought no reform to Italy. Now Monti and Draghi have all the right plans but no enthusiasm to get them passed. The worst-case scenario is hardly impossible: It could already be too late to act. Or the populist opposition could be too strong and violent for Monti's fragile coalition. In that case, Italy will go limping back to the lira -- that is, if it does not become a German colony first.

But Napolitano is savvy and will rein in the radical left. Monti, Draghi, Amato, and Letta will hold the different political parties together, grounding them on national interests. And Berlusconi? He will go through a serious depression. He may take comfort in partying for a while, but eventually he will return to his media empire.

Over the last week, when Berlusconi refused to quit, the market took a toll on his holding, Mediaset, which lost 12 percent in a matter of hours. According to press reports, his longtime business partner, Fedele Confalonieri, said to him, "Silvio, soon there will be nothing left for your kids." So the conflict of interests will now reverse. Silvio the media mogul has a vested interest that Italy does not default.

Photo from neilalderney123 / flickr.

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