Margaret Scott

The Economic Consequences of Silvio Berlusconi

The decision by Silvio Belusconi's fourth government not to boost spending when financial crisis and recession struck may well have spared Italy a run-up in debt that it could not afford. Unfortunately, the measures that the government did take were utterly wrong, and major structural reforms were ignored.

MILAN – Silvio Berlusconi has survived a confidence vote, but his government is virtually dead. One cannot rule a country with so scant a majority. Not for long.  

The one important decision that this, Berlusconi’s fourth government, ever bothered to take was a decision not to decide. Two years ago, when financial crisis shook the world, Berlusconi’s choice was to avoid any policy intervention to counteract the Great Recession. This contributed to the deepest fall in output in Italy’s postwar history, with a cumulative 6.5% decline in GDP. Within the G-20, only Japan did worse.

Remarkably, Italy had twice the fall in output seen in France, another large OECD country that, like Italy, had avoided the root causes of the crisis: a housing boom-bust sequence and a serious bank crisis. The paradox is that the Berlusconi government’s inaction did prevent a major deterioration in the public deficit. In light of the current debt crisis roiling the eurozone, the advantages of a policy of inertia are easy to appreciate. Italy’s position today could have been much worse than it is.

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