Italian Prime Minister Berlusconi to Resign

Only a few days after Greek Prime Minister George Papandreou resigned, and after spending a couple of weeks swatting down rumors that he would soon leave office, Italian Prime Minister Silvio Berlusconi announced on Tuesday that he was resigning as well.  As reported by Reuters:

Italian Prime Minister Silvio Berlusconi has told President Giorgio Napolitano that he will resign after the new budget law currently making its way through parliament is approved, the head of state’s office said in a statement on Tuesday.

The budget law is expected to be passed by the end of this month, but its passage might now be accelerated.

Napolitano said Berlusconi was aware of the consequences of a vote in parliament on Tuesday in which his center-right coalition failed to secure a majority in the lower house.

The Financial Times has more details of that parliamentary vote, whose outcome Berlusconi did not take very well:

Mr Berlusconi met on Tuesday night with Giorgio Napolitano, head of state, after conferring with party leaders in the wake of his parliamentary setback. Ansa news agency had reported earlier that the 75-year-old prime minister would make one last effort to save his centre-right coalition government in a vote of confidence.

The government survived a motion ratifying the 2010 accounts in the lower house, but lost as many as eight deputies from Mr Berlusconi’s People of Liberty party who joined opposition parties in abstaining from the vote. This reduced the government’s votes to 308 – eight short of an absolute majority.

“Eight traitors,” Mr Berlusconi reportedly wrote in a note which a photographer managed to snap in the chamber.

Berlusconi dodged over fifty previous no-confidence bullets during his three tenures in the Prime Minister’s office.  He’s been there on and off since 1994.  He’ll be leaving for good no later than the first week of December… and maybe even sooner, if the Italian bond market gets any worse.  The cost of servicing Italy’s massive debt – over $2.5 trillion U.S. dollars, or about 120% of GDP – has been spiraling out of control.  Ten-year bonds were pushing dangerously close to the 7% yield that would precipitate a meltdown. 

Italy’s economy is much larger and stronger than that of Greece… and too big to rescue, in the event of a collapse.  Italians have reacted about as well as Greeks to the austerity measures imposed thus far, as the New York Times related on the day after Berlusconi survived his previous confidence vote on October 15:

As the smoke cleared Sunday, a day after a peaceful, inchoate demonstration near the Colosseum turned into a riot, Italy fell into national soul-searching and finger-pointing.

What caused the violence was clear. Groups of violent youths smashed shop windows, set fire to cars and scuffled with the police, turning a coordinated march against global economic woes into the worst rioting in Italy since the Group of 8 summit meeting in Genoa in 2001.

But what was less clear was why the Italian authorities had failed to prevent the violence, or how it would reverberate in the most volatile political climate in Italy in decades.

The rioters turned out to be an eclectic mixture of “right-wing soccer fan groups” and “self-styled anarchist groups,” which did not reassure the citizens of Rome that the government was on top of things.  Both the public and the markets needed a change of leadership to restore confidence.  The leader of the Italian opposition party said, “We all know that Italy runs the real risk of not being able to access the financial markets in the next few days.”  That’s a very bad place to be.

The New York Times reports that market reaction to the Berlusconi resignation was at least tentatively positive:

Powered by an early rally in Europe, the stock market in the United States rose slightly before a budget vote in Italy that had taken on immense importance for the prime minister, Silvio Berlusconi, after the recent defections of several lawmakers in his party. It passed with numerous abstentions, but Mr. Berlusconi lost his absolute majority.

Stocks then declined or were flat in afternoon trading until about two hours before the end of the session, when news that Mr. Berlusconi had offered to resign — after Parliament passes an austerity package — first emerged.

At 4 p.m., the Dow Jones industrial average was up 0.8 percent, or 102 points, to 12,170. The broader Standard & Poor’s 500-stock index was up 1.2 percent to 1,276, and the technology-heavy Nasdaq composite index was up 1.2 percent to 2,727.

Berlusconi no longer had the political muscle to get anything done.  Once he’s out of office, a rather large number of corruption cases are going to catch up to him.  Italy’s problems will remain, as it struggles to sell enough debt, at low enough interest rates, to finance lavish government spending.  Along with Ireland, Spain, Portugal, and of course Greece, Italy is teaching the West that there isn’t enough money in the world to keep the Twentieth Century running for much longer.