The fall of Rome

Berlusconi’s announcement last week that he intended to resign had the immediate effect of sending the markets higher. It perhaps comes as no surprise that the swift exit of the man who, by his own admission went into politics to avoid prison, sent investor confidence on the rise during a sustained period of choppy waters. With over 20 indictments to his name, his trajectory from cruise ship singer, to construction magnate to prime minister has been peppered with misdemeanours, ranging from sexual misconduct to criminal activity. Few regret his departure.

The indignation directed towards l’enfant terrible of European politics has, if anything, been intensified by the height from which Italy has fallen. As the world’s fourth largest debt market its fragility has sent potentially catastrophic tremors through the eurozone. Optimists point to the fact that (interest payments excluded) it has retained a fiscal surplus, putting it in better stead than other European nations. Yet, the fact that the country’s sluggish economic growth over the last decade was rivalled only by Haiti and Zimbabwe (as The Economist reported this week) suggests serious mismanagement, extending beyond the exploits of one loveable rogue to problems endemic in the whole political system.

The last decades have seen successive governments mired in inefficient bureaucracy and corruption, prey to powerful lobbyists with vested interests. Coupled with a rigid public sector, whose backing by heavyweight unions has left politicians powerless to enforce appropriate policy, competition has been stifled. It was precisely this that caused Standard and Poor to lower the country’s credit rating in September. This shows us, if anything, that the current Italian debt crisis is no one man show, but a reflection of engrained structural as well as political problems; problems linked, but by no means exclusive, to Berlusconi.

Strong leadership, or rather the lack of it, is not an obvious explanation of Italy’s decline: the country has seen 60 governments in the post-war era alone and has managed to retain its reputation as a solid European economic powerhouse until relatively recently. Its consistently high credit rating has secured a plentiful supply of capital which has, in turn, spurred it on to borrow more and more, lured by a false sense of security that its borrowing rates would stay low. Therein lies the problem. With anaemic growth over the past 10 years, a range of structural inefficiencies and the loss of the devaluation release valve, the sovereign debt markets have now lost confidence that Italy can get the economy moving in a way that will generate the future wealth to service its debts. In truth, the country’s debt burden has long been at risk of becoming unsustainable. The optimism that has accompanied the entry of technocrat Mario Monti will be too. The bunga bunga party is well and truly over and the clean-up will be a long and arduous process.