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.
The Italian economy’s problems, and the major issues concerning the sustainability of the country’s huge public debt, are rooted in low growth of potential output. As is also revealed by the term structure of credit-default swaps for Italian debt, investors are not worried about, say, the 2011 budget law. Instead, they are worried about Italy’s economic conditions in 5-10 years.