The End of the Roman Holiday

The month of August derives both its name and its spirit from the ancient Roman Empire of Augustus, when the month was declared a sacred time of rest and relaxation for the Italian nation. A visitor to Rome in the middle of August will normally see a capital city shut down for all official business. This year, alas, things are different. Italians still crave their respite, but increasingly they can no longer afford it — neither psychologically, nor economically.

Italy’s borrowing costs rose dramatically to an 11-year high at a bond auction this Thursday, July 28th, a signal that the markets aren’t content with the latest eurozone bailout package or the austerity measures recently passed by the Italian Parliament. The Bank of Italy has admitted that if the interest rates on Italian bonds don’t lower sometime soon, it will pose a "substantial" problem for the Italian economy, perhaps pushing the country back into recession — and perhaps, in the worst case scenario, out of the eurozone.

Rome’s rumor mills are now working overtime. Will Italy default? Will speculators bleed the country dry before Aug. 15? Will Prime Minister Silvio Berlusconi still be in office when the Campionato, the Italian professional soccer league, begins on Aug. 29? If not, who will replace him? Will his finance minister, the cerebral Giulio Tremonti, stay on? Has the opposition, at long last, concocted a decent alternative strategy, summoning a viable candidate for prime minister? At the restaurants of the political elite, conspiracy theories are sprinkled with more gusto than Parmigiano on their fresh tomato and basil pasta.

The truth is, nobody knows how Italy will get out of this mess. What’s clear is that Berlusconi, whose term ends in 2013, is running on empty. He was first elected in 1994, and though he has been blessed with a center-left political opposition that has only managed to unseat him twice since then, it’s obvious that he’s now tired and no longer up to the challenges of the moment. It wasn’t sex scandals that finally did him in — it was bond markets. The financial crisis has irreversibly dampened the sunny, tanned optimism that "Silvio" has been offering the public for years. And judging from recent evidence, voters are craving any sort of alternative.

This spring, voters surprised nearly all Italian political analysts, including me, by ousting from office the once-popular mayor of Milan, Letizia Moratti, a Berlusconi ally. It was the first time the center-right had lost a mayoral election in the northern Italian city. Indeed, Berlusconi’s party, the People of Freedom, had made a priority of winning the country’s richest and most fashionable metropolitan areas — the better to depict the center-left opposition as outmoded, backwater, communist relics. But the left’s winning candidate, Giuliano Pisapia, a respected lawyer with deep local roots, belied those stereotypes. Right after Berlusconi’s candidate lost Milan, voters inflicted another blow, in a series of referenda on a proposed law that would have shielded the prime minister from his judicial troubles, as well as in a number of other bills on nuclear power and public water rights.

Those defeats show how hollowed out much of Berlusconi’s support is today. The prime minister’s cabinet is now engaged in a civil war of slanders, suspicion, and blackmail, as those who once protected the prime minister are now turning against him and each other. His respected chief of staff, Gianni Letta, has been linked in the media to a jailed lobbyist, accused of swapping bribes for powerful civil-service positions. Last week in Naples, Parliament member Alfonso Papa, a Berlusconi ally, was arrested on corruption charges, becoming the first Italian MP to be arrested in three decades. A former prosecutor, Papa is accused of illegally alerting people under investigation about whether their phones were being tapped by the judges. Luigi Bisignani, a person previously convicted of illegally lobbying for the Freemasons, is also under arrest for involvement in the scheme.

Even Tremonti, the man credited with steering Italy away from a Greek-like flirtation with default, is accused of illegally renting and failing to pay taxes on a luxury home in central Rome arranged by his right-hand man Marco Milanese. Milanese himself might soon be indicted for influence peddling. Tremonti, for his part, not only denies being a tax cheat, but claims he was discreetly living in Milanese’s apartment in order "to protect myself" because he was being "followed and spied upon." Tremonti has not indicated yet who was out to get him or why, but off the record, members of his staff point to "people in our own political coalition," the die-hard Berlusconi loyalists.

Meanwhile, from his palace overlooking the capital, President Giorgio Napolitano, the only politician Italians still trust in polls, has been acting with caution and wisdom. Boldly utilizing the few powers entrusted to him by Italy’s Constitution, he has managed — together with Italy’s Supreme Court — to curb, if not eradicate, Berlusconi’s conflict of interest. Napolitano has refused to sign a number of laws intended to further Parliament’s personal interests, rather than the public good. And without the assurance of Napolitano’s backing, Italy’s Constitutional Court likely would not have felt confident enough to reject a number of laws granting Berlusconi immunity from prosecution. Napolitano also successfully used personal diplomacy to convince Parliament’s reluctant left and belligerent right to vote for Tremonti’s austerity measures. (Tremonti’s budget wasn’t perfect — it notably delayed most cuts until 2013 — but it at least avoided a descent into an Athenian state of debt turmoil.)

Napolitano is a reflection of the Italian politicians’ better nature and proof that there are limits to their cynicism. Indeed, once it senses the political abyss, the Italian establishment always pulls back from the brink. Ultimately, it’s the establishment’s instinct for self-preservation that should assure the international markets that Italy will manage its way out of its current crisis. In the 1990s, for example, Prime Minister Giuliano Amato saved the country from bankruptcy, paving the way for his successors to secure Italy’s place in the eurozone, against all odds.

And, whatever its political troubles, the country’s economic fundamentals are sound. The Financial Times‘ Martin Wolf has praised Italy’s vibrant network of privately owned companies. Banks are — in the European context, at least — in good shape. Italians have a high personal savings rate, and when they’re in need — whether because of unemployment, old age, or even lack of funding for a business — they tend to turn to one another, especially members of their family, rather than the welfare state or officially administered bureaucracies. The current turmoil in the bond markets is a result of rank speculation, not any careful assessment of the country’s true economic fundamentals.

That said, Italy has to acknowledge it has lived far beyond its means. That won’t be easy for three generations groomed in la dolce vita — long vacations, early retirement, low hours, and absolute job security. The influential Mario Draghi, governor of the Bank of Italy and soon-to-be chairman of the European Central Bank, has dictated the necessary reforms in his farewell speech to his colleagues at the bank. The government will have to impose structural reforms, end political patronage and pork, improve schools, and develop a strategic plan for infrastructure. It will need to dismantle the guilds, which stifle competition and discourage innovation not only among blue-collar workers, but professionals, too. Taxes are too high, and tax dodging is much too common, as the penalty is not enough to scare off the practice. The prescription is clear. The only question is whether Italy will administer its own medicine or wait until the bitter pills are forced on it by outsiders.

Cooler heads are already talking of ousting Berlusconi and setting up a transitional government until a new election can be held. Mario Monti, the former EU antitrust commissioner and current president of Bocconi University, is frequently mentioned as a possible new prime minister. In that scenario, the moderates in Berlusconi’s coalition, Sen. Beppe Pisanu among them, would join with former center-right allies, like Pier Ferdinando Casini of the Christian Democrats and Speaker of the House Gianfranco Fini, to form a new cabinet.

Meanwhile, on the center-left, Pier Luigi Bersani is doing better than predicted as leader of Partito Democratico, using his self-deprecating wit on television talk shows to win new support and nurture back to life his agenda to liberalize the economy, stifled in 2006. (His case has not been helped by the fact that members of his party have recently been accused of accepting bribes; Bersani will soon have to use his charms to defend his colleagues, rather than promote his platform.) Other members of the left, like Nichi Vendola, governor of Apulia and one of the few openly gay leaders in stuffy Italian politics, and Antonio Di Pietro, an ebullient former prosecutor, have to decide whether they will stay on the sidelines and feed the populist rage or join the efforts to revitalize the country. The popular mayor of Turin, Piero Fassino, and the former mayor of Rome, Francesco Rutelli, could, for their part, act as veteran brokers between the country’s usually belligerent factions.

The only luxury Italy does not have is time. Europe in general, and Italy in particular, are in too fragile a political condition to consider waiting much longer for a solution. Europe is presently divided into two tribes: the Strong Euro tribe, consisting of Germany, France, and the Netherlands, and the Weak Euro tribe, comprising Greece, Spain, Portugal, and Ireland.

And then there is Italy. Italy is itself divided into strong and weak regions. From the Alps to Rome, the country fits perfectly as one of the best-performing members of the Strong Euro clan. Southern Italy, however, would find it difficult to survive even in the Weak Euro clan. This divide fuels resentment and populism throughout Italy. The Northern League, a regional party with a large following in the north, has continued to support Berlusconi, but it might soon break away from its alliances, as it did in 1994, and is already talking of moving the country’s capital from Rome to Monza, in the north, at least symbolically. Meanwhile in the south, Gianfranco Micciché, a Berlusconi protégé, is working on a Sicilian breakaway party, while the new mayor of Naples, a former prosecutor, already acts as an independent local chieftain. Berlusconi has managed to build a north-south coalition by leveraging his large media empire, but it could easily come undone, unhinging the entire nation.

If this catastrophe is to be avoided, Berlusconi should step aside. This will give an interim cabinet time to fix the economy and write a decent new electoral law. Then a reformed opposition will have its opportunity to steer the country, rather than just cast insults from the sidelines while the right finds a new leader. Italy’s reputation has taken a beating on the international stage in recent years — not the least of the reasons why it is suffering on the credit markets. But sometimes a reshuffling of the political establishment and a thorough scrub and polish of the national pride can do wonders. Packing Berlusconi off does not mean, alas, a true vacation for all of Italy. The hard work to rebuild a political and moral cohesion will start then: It will not be an easy job.