Berlusconi’s win
THE return of Silvio Berlusconi to the Italian political stage sends a very strong message to Europe’s leaders that they will have to be more ambitious if they want to hold their currency union together.
In parliamentary elections, Italian voters reposed enough confidence on Berlusconi to form a stable government. And in doing so, voters rejected the technocratic policies of outgoing Prime Minister Mario Monti, whose efforts to raise taxes, cut pensions and curb budget deficits helped bring the govt back from the brink of bankruptcy. One in four Italians rebuffed Monti’s austerity plan by voting for a comedian. Stock markets plunged, and the yield on Italy’s 10-year bond rose to 4.9 percent, its highest level since November.
The turnaround shows the complicated game Europe’s policy makers are playing as they seek to calm nervous markets and to push the euro area’s afflicted members to repair their finances. To make solvency achievable for countries such as Spain and Italy, the European Central Bank has rightly pledged its unlimited support to keep borrowing costs down. By removing the threat of imminent financial crisis, however, the ECB’s support has taken the pressure off voters to keep approving austerity policies that are driving their economies into recession.
Italy’s rebellion against austerity augurs ill for other euro-area countries. Some have much further to go than Italy to get their finances in order. Spain must still cut spending or increase revenue by almost 6 percent of gross domestic product to stop its debt burden from growing. That’s more than seven times the across-theboard spending cuts that are set to take effect March 1 in the US polls in Greece, which still has a lot of belttightening to do, already suggest that the anti-austerity Syriza party would triumph in a new election. Even if govts could stick to their austerity programs, they might only succeed in killing the economic growth they need to restore financial health.
The IMF officials are reassessing the effects of deficitcutting during times of distress, saying that it’s more economically damaging than they previously thought. The way out isn’t easy. Austerity measures will never be popular with voters unless they are convinced the pain is widely shared and short-lived. What’s more, countries with such divergent economies can’t share a currency unless they put in place some risk-sharing mechanisms. The best way to deal with both shortcomings is through a system of fiscal transfers. This would involve sending money from growing economies to those in recession, easing the difficult adjustments the latter must make to recover.