The bankers take over in Italy

November 15, 2011

Lee Sustar explains how the European financial crisis led to the fall of Silvio Berlusconi.

THE SLEAZY crook who dominated Italian politics for nearly two decades is gone--only to be replaced by an unelected "eurocrat" installed by bankers to make working people pay for Europe's relentless financial crisis.

When Mario Monti took over from Silvio Berlusconi as prime minister November 14, financial markets gave Italy some breathing space--the country was able to sell 10-year government bonds November 14 at an interest rate of 6.29 percent. The comparable rate for German bonds is 2.25 percent. In other words, just to fund its operations, the Italian government must pay nearly three times the amount of interest that Germany does.

Italian government debt is already equivalent to 120 percent of the country's gross domestic product (GDP), so the spiking interest rates have big international banks and European Union politicians worried that Italy won't be able to repay its debts.

A default by Italy--the seventh-largest economy in the world and the No. 2 manufacturing power in the European Union--would create a banking crisis that could break up the eurozone, rip through the world financial system and trigger another major recession. In comparison to Italy, with its population of 60 million, the crisis in the relatively small economies of Greece, Portugal and Ireland are a sideshow.

Former Italian Prime Minister Silvio Berlusconi
Former Italian Prime Minister Silvio Berlusconi

That's why the heads of the powerhouse countries of the eurozone, German Chancellor Angela Merkel and French President Nicholas Sarkozy, were for weeks ratcheting up pressure on the scandal-ridden Berlusconi to resign--and forcing him to accept oversight by bureaucrats of the European Union (EU), European Central Bank and International Monetary Fund (IMF).

The bankers delivered the final blow when they demanded sky-high interest rates to buy Italian government bonds--and a new prime minister who would answer to them rather than the Italian voters. Berlusconi backed passage of an austerity program in parliament, and then made way for his successor, former European Competition Commissioner Mario Monti, a creature of the EU's administration in Brussels.

Monti has zero electoral legitimacy in Italian politics. He was only eligible to become prime minister after being appointed a senator for life by Italy's formal head of state. And there's no doubt where Monti's loyalties lie, as a Financial Times columnist noted in reporting a comment from "a prominent Italian banker": "We need a strong national unity government for one to one-and-a-half years to do what the politicians haven't had the courage to do."

Thus, for the first time since the Allied occupations at the end of the Second World War, a major European country has lost at least partial control of its economic policies. Like Greece, Italy finds its policies being dictated by unaccountable bureaucrats and bankers--while its people face a dramatic cuts in living standards.

THE NEW Italian government of "technocrats"--that is, unelected apparatchiks--may calm the markets' fears of an Italian default in the short term. But the euro crisis remains.

By binding together countries of all economic shapes and sizes, the creation of eurozone sharing a common currency allowed small countries like Greece or Portugal to borrow money on the same terms as Germany, the dominant economy in Europe. Germany benefited from keeping the euro low relative to other major currencies, which helped it boost exports.

Since the financial crash of 2008, however, the contradictions of the eurozone have come to a head.

First, governments across the eurozone bailed out their banks, as in the U.S., Britain and elsewhere, committing trillions of dollars to a series of rescues. Private debt was taken onto the governments' books. But unlike the U.S., where the Federal Reserve Bank could effectively print money and the U.S. Treasury could set a unified economic policy, the ECB isn't backed by any one government, and there's no common European treasury.

Thus, when the "peripheral" eurozone countries of Greece, Portugal and Ireland found out in 2010 that they couldn't digest the bank debts their governments had absorbed, the main powers of the eurozone have scrambled to put together one rescue plan after another.

To get bailed out, however, countries like Greece have had to agree to devastating cuts in social spending, layoffs of government workers and regressive tax increases. These measures have led in Greece to a 1930s-style economic contraction of 7.3 percent from 2010 to 2011.

Compared to Greece, Italy's government budget deficit is low--4 percent of GDP. (The U.S. federal deficit is 8.7 percent of GDP.) But because the Italian economy shrank by 5.5 percent in 2008-09 and has only grown at about 1 percent a year since then, bankers fear that Italy simply won't have the economic growth to make good on all of its debt.

The bankers desperately need that money. Despite the bailouts of 2008-09, European banks are still riddled with bad debt, much of it from government bonds in Greece, Italy and elsewhere. Even a partial default on debt repayments--a "haircut" in financial slang--could start the dominoes falling. Already, European leaders are vowing to "recapitalize" the banks--that is, carry out another bailout--to keep them afloat in the event of the expected debt default in Greece and possibly other countries.

According to Wolfgang Munchau of the Financial Times, bankers panicked about Italy after the EU's European Council began pressuring creditors to accept bigger losses on Greek government debt than they had previously accepted. He wrote:

With that decision, European leaders destroyed what was left of a functioning eurozone government bond market. Investors interpreted it--correctly in my view--as a precedent. They then dumped their Portuguese, Spanish, Italian and even French government bonds.

The eurozone's serial bailout packages, now institutionalized through the European Financial Stability Fund (EFSF), were supposed to ease fears of such defaults. Once Greece and other countries agreed to austerity programs, the EFSF was to provide a steady flow of funds to the hard-hit countries--money that would make its way back to French, German and other big-country banks.

But even at $600 billion, the EFSF lacks the firepower to bail out Italy. And if the debt crisis engulfs Spain, another huge eurozone economy, all bets are off.

With the EFSF unable to fund the expected rescue, some have called for the ECB--which has already stepped in to buy Italian government bonds--to be the lender of last resort for countries suffering under a heavy load of debt.

But this would effectively put the German economy on the hook for the rest of the eurozone's debt. German politicians and business heavyweights are unwilling to put their entire economy on the line to bail out weaker economies--and that effort might not succeed anyway. The result is a eurozone policy stalemate.

In this context, longstanding worries about Italy's poor economic performance and policy deadlocks suddenly became a panic. Berlusconi was tossed overboard as the Italian and European ruling classes scrambled for a solution. But while European bankers and bureaucrats may have seized control of the Italian government, they still don't have a clue about how to overcome the crisis.

FOR THE majority of Italians, the ouster of Berlusconi couldn't come soon enough. The media magnate who first become prime minister in 1994 had seen his popularity sink to 22 percent as he was involved in a series of corruption and sex scandals involving prostitution, including allegations he had sex with a 17-year-old woman.

Business leaders had been pressuring him to step down as Italy's economic prospects dimmed, but the right-wing coalition he leads, fearful of losses in new parliamentary elections, kept him office until financial panic threatened to overwhelm the country.

Yet the Italian right isn't necessarily doomed in a future vote. That's because the Italian center-left parties--including the ex-Italian Communist Party, now part of the Democratic Party--support the austerity consensus.

When Berlusconi's last government fell in 2006, it was replaced by a government led by Romano Prodi, a former president of the European Commission who served as prime minister for less than two years before Berlusconi recaptured the top office with the help of his parliamentary allies, the neofascist National Alliance and the anti-immigrant Northern League.

The challenge now is for the large, but divided, Italian left to resist the next round of austerity measures, which will likely target pensions, labor rights, social spending and more. Big anti-austerity union demonstrations in September, followed by a major street battle with police a month later involving property damage, could be a foretaste of things to come.

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