Courtesy Reuters

How Italy's Democracy Leads to Financial Crisis

An Economic History of Italian Politics

The replacement of former Italian Prime Minister Silvio Berlusconi with Mario Monti, a former European commissioner, last week marks a new stage in the European financial crisis. Along with bond values, the crisis now seems to be wiping out democratically elected governments. Faced with unbearable market pressure, Italian politicians have opted to hand power to technocrats, expecting that they will somehow enjoy greater legitimacy as they impose painful measures on an angry population. This will not work.

On one level, Italy's problems are less acute than those facing the region's other troubled economies. Its economic structure, which is based on a large manufacturing sector focused on exporting high-value products, has more in common with Germany than with Greece. The country has unparalleled cultural riches, a highly educated population, and a strong tradition of entrepreneurship. And despite its apparently dysfunctional institutions, Italy remains the eighth-largest economy in the world. On another level, Italy's problems are huge. Its debt-to-GDP ratio is massive; it has now reached 119 percent (although no one batted an eye when the ratio was 121 percent ten years ago). The markets seem convinced that its recent sclerotic growth has made the debt level unsustainable without structural reform. External observers have come up with long lists of such reforms, which, they argue, Monti will be able to implement quickly.

If things were that simple, however, Italians would have voted for someone like Monti in the first place. If anything, the last two decades have shown that there are no quick technocratic fixes for the Italian political economy.

Berlusconi rose to power in 1994, filling a vacuum in the center-right. That wing's main party had just been dismantled during an anticorruption drive by the Italian judiciary. Berlusconi hurried to create a new party, but he did not build a conventional one. Instead, he leveraged his television channels and national network of advertising salesmen to make a virtual party -- one with no real grass-roots membership, entirely dependent on his resources and patronage. Conservative Italian

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