Source: The Malta Independent
by George M. Mangion
Article published on 13 November 2011
Trying to predict Italy’s economic future is not easy when one reads that the latest 10-year bond yield closed at a euro-era high of 7.25 per cent. This comes hot on the heels of Prime Minister Silvio Berlusconi’s proposed resignation. Those who thought Berlusconi’s resignation was the solution to the high debt crisis were disappointed. Investors are exasperated with the two-year debt crisis¸ which started with the Greek insolvency¸ followed by Ireland and Portugal.
With the end of the Berlusconi era¸ investors fear a spillover of the crisis on Italy and the end of la dolce vita. Italians are afraid they could be the next victims of the euro crisis. Compared to other countries in Europe that still have the triple A status¸ like Germany for example¸ Italy’s interest rates for new bonds are dangerous high.
“The market’s focus is shifting to Italy¸” said Yunosuke Ikeda¸ an analyst of foreign-exchange research at Nomura Securities Co. High returns and risk premiums are considered a sign of great distrust by investors. Due to these uncertainties¸ stocks dropped recently and the euro fell against the dollar and yen. The more the yield rises¸ the more money Italy has to shell out to finance its debt – the start of a debt spiral? The third largest economy in the EU has a huge debt of €1¸900 billion– that is about 120 per cent of the gross domestic product (GDP). The strong economy of the post-war period had allowed Italian people some luxuries such as retiring at the age of 50 (Germans retire at 67).
Public spending rose astronomically and as a result a political class emerged that consumed about half of the national wealth generated annually. The easygoing Italians expected little interference from their government and are now to be punished for paying expensive house renovations¸ dental treatments or even a cappuccino ‘under the table’. The penalty for decades of a life of dissipation must be paid and¸ especially in the current EU crisis¸ Italy has to pay a great deal. The government’s instability is reflected in a growing unease about contagion that has spread like wild fire across Italy. The Italian economy has not yet recovered from the financial crisis of 2008¸ which paralysed factories and workers. In addition¸ continued economic turmoil and restructuring goals undermine consumer confidence.
Prime Minister Silvio Berlusconi has been in the limelight since 1994¸ charged with alleged financial crimes and sex scandals¸ but using his seat of power has helped him to survive several criminal procedures. But in the last days the elusive head of government has progressively lost his majority in Parliament. For several weeks there were various rumours on whether Berlusconi intended to resign and pave the way for either new elections or for a transitional government. Financial markets were stunned when Berlusconi was saved in a vote of confidence¸ which saw most delegates opting to abstain; he was saved by a razor thin majority which belies