Berlusconi battles towards an Italian liberation

Not just since Silvio Berlusconi's announcement to run once more for the top job in Italian politics has Italy been a perplexing country. In any other nation, the prospect of a 76-year-old convicted tax evader re-entering politics would be laughed at – especially if, like Berlusconi, he was with one foot in prison, had a dubious personal reputation and a poor political track record.

Only in Italy could this be an important event able to change the dynamic of its economic crisis.

If it is hard to understand how a character like three-times prime minister Berlusconi could still be seen as a serious political figure (or rather a political force that has to be taken seriously), it is even harder to make sense of the political and economic implications of his fourth coming. It depends entirely on one's view of Italy.

There are two schools of thought when it comes to Italy. The first locates it firmly among Europe's basket cases: virtually ungovernable, plagued by tax evasion, corruption, low productivity growth, high public debt, and heading for a demographic crisis due to chronically low fertility rates. It is a view of Italy as a country always just one step away from becoming a failed state.

The second way of thinking about Italy is much more benign. Acknowledging all of the above-mentioned problems, it would maintain that Italy has always been like this – and survived. It gives the Italians credit for routinely making the unworkable work. It also notices that, despite all its grave political and economic problems, Italy remains one of the least indebted developed countries when private and public debt are aggregated. Italians are among the world's best savers, and Italian households are on average more than a third wealthier than, for example, German households.

The two conflicting views of Italy are hard to reconcile for anyone who has never visited the country. However, if you have been to Italy you will immediately understand that they go together well. Italy is always both: fascinating and frustrating, uplifting and underwhelming.

It has never been different. As singer-songwriter Giorgio Gaber put it in one of his famous songs almost 30 years ago: "Benvenuto il luogo delle confusioni dove i conti non tornano mai ma non si ha paura delle contraddizioni... Welcome to the place of confusion where nothing ever adds up but there is no fear of contradictions.”

With Berlusconi back in the arena, the political armistice in Italy over the implementation of cautious economic reforms combined with fiscal restraint is over. He will campaign against these policies that had been dictated to Italy, arguing that they have failed. This has consequences for both Italy and its European neighbours.

What many of Italy's European partners will be concluding from Berlusconi's surprise resurrection is clear. It will confirm all their misgivings and prejudices about the country. It will underline the ugly side of Italy – of the country plagued by corruption, notorious political instability and unreliability in its international dealings.

Northern and central Europeans will be asking themselves what all their support for Italy is worth if in the end Italy does not keep its commitment to austerity and reforms. They will question whether it was wise for the European Central Bank, incidentally also headed by an Italian, to buy Italian government bonds and bail out Italy's banks by providing them access to virtually unlimited liquidity. Didn't these measures undermine the urgency of reform, and isn't that the very reason that made Berlusconi's return possible?

With Berlusconi back on the political stage, those euro bailout critics will say that whatever support is granted to the European periphery it will only lead to moral hazard. The moment a country is ‘rescued', it no longer feels the need to reform and get its finances under control. It may even revert to someone like Silvio Berlusconi.

There is another way of looking at these events, though. One does not have to like Berlusconi to recognise that his populist opposition to the conditions of the implicit Italian bailout is at least partly justified. He may be a crook but he certainly has a point.

Since Mario Monti took over as Italian prime minister, Italy's recession has accelerated while unemployment has shot up. Yet despite his attempts of controlling the budget deficit, his government has been unable to reduce Italy's public debt burden. The reverse is true: whereas before Monti's reign public debt was high and stable at around 120 per cent of GDP, it is now rising quickly.

As it turns out, Italy's problems could not and cannot be alleviated by a combination of budget restraint and (modest) economic reforms. What the country would need is something completely different – and something that Italy has done routinely in the past: to devalue its currency in order to regain competitiveness with its central and northern European neighbours.

This pathway to recovery is firmly blocked as long as Italy remains in the eurozone. This only leaves the policies of ‘internal devaluation', which are currently being tried with horrific results on growth and unemployment.

It should be easy for any politician to campaign against these policies, particularly because they can point to the positive aspects of the economy that make Italy so different from the real basket cases like Greece. Italy remains a rich country, with a healthy savings culture and crucially, the Italian government is running substantial primary budget surpluses.

Under such circumstances, Italy could easily find an exit from its debt crisis by turning its back on the euro and recover based on its own strengths. It certainly would not need external help from the EU or the ECB let alone the IMF. Instead, it would rely on its own domestic capital market while regaining international ground with a devalued New Italian Lira. In effect, this is what Berlusconi will be offering as his alternative to continued EU imposed austerity policies.

No matter what you think of Berlusconi, his return points to the main problem: Monetary union with the German bloc was never going to work for Italy. Their economic and political cultures are too different and fundamentally incompatible. This experiment has left both sides frustrated, and it is an unhappy marriage that Berlusconi now aims to end.

Because of all his personal failings, it is unlikely the Italians will give Berlusconi a fourth chance to lead their country. But he will at least trigger a debate on the benefits of Italy's continued eurozone membership, which may well end up with a divorce.

Dr Oliver Marc Hartwich is executive director of The New Zealand Initiative.