A Dispatch from the Frontline
So far the European summer is proving to be a far cry from last year’s panicky crisis mode. The euro zone is still intact. The latest available data point to a stabilization of the economic situation or ― better still ―, a return to growth later this year. Mario Draghi’s promise to do whatever it takes is still credible. The president of the European Central Bank (ECB) truly appears to have silenced the doomsayers. A good friend of mine, who works as an investment banker for one of the biggest global banks in London, told me that having Draghi at the ECB and Angela Merkel at the helm of the German government is the best thing that could happen to Europe. As long as the duo keeps on running things, he said, the situation should slowly improve and the old continent should do just fine.
Yet, having visited some of the weaker fronts in this long battle to save the euro and Europe over the past weeks, I must admit that I am not sure I share this optimism. German officials are worried about losing momentum on enforcing structural reforms in some of the peripheral countries, and there are good reasons for their concerns.
Indeed, the absence of market pressure on sovereign bonds is proving to be a very tempting opportunity for a discredited political class in Italy to resume playing games with the future of the country. Italy could very well be on the brink of renewed political turbulence. Next week, on July 30, the Corte di Cassazione, Italy’s Supreme Court, will issue the ruling on one of the innumerable trials that involve former prime minister Silvio Berlusconi. This time the controversial billionaire turned politician will not be able to appeal the verdict. It will be the court’s final word. Despite no lack of public muscle flexing on Berlusconi’s part, some of my Italian friends tell me that the flamboyant politician is ― understandably ― terrified by the prospect of a conviction. The former prime minister could be forced to serve a prison sentence, but it is an unlikely outcome. However, if Berlusconi were to be barred from political office – which is entirely possible -, his political future would be sealed. His party, the Freedom Party (PDL) would find itself with no leader. Berlusconi’s possible heir, Angelino Alfano, currently serving as Minister of the Interiors in a grand coalition with the archenemies of the center left Democratic Party (PD), is extremely weak. Things could unravel quickly. The PD could be tempted to seize the opportunity and force snap elections.
The constant barrage of critical press reports, and many mistakes of their own making, have also weakened the anti-establishment party, Five Star Movement (M5S), of former comedian Beppe Grillo.
An early vote could also short-circuit the leadership challenge within the PD itself, which is currently pitching the thirty-eight year-old mayor of Florence, Matteo Renzi, against the party’s old establishment. The old guard has no intention of handing the party to the young mayor. The power struggle within the left is at least as big and vicious as the ongoing war against Berlusconi. All this makes for a toxic mix, in the midst of which Enrico Letta, the current prime minister, is trying to navigate. His government has taken some minor steps toward addressing some of the structural weaknesses of the Italian economy, such as simplifying the bureaucratic maze companies face when trying to do business in the country. However, these are only first steps and the political will to do more is simply not there.
Faced with this spectacle Italians are getting angrier and angrier with politicians of all stripes. While the Italian establishment almost obsessively points the finger at Angela Merkel and her politics of austerity, I found scant evidence of such feelings among regular citizens. According to all the people I talked to, it is Italian politicians who are to blame. If the troubled relationship between citizens and politicians deteriorates further, enforcing any policy will become even harder.
Latest data already point to a troubling development. Tax evasion is going up instead of going down. I know of Italian entrepreneurs who instead of rolling up their sleeves, prefered to use companies’ funds to refuel their personal yachts. When questioned by their own employees, they replied that there was nothing to worry about and claimed they were too small to come under the scrutiny of tax authorities. When questioned by international bankers, representatives of the Italian industry often claim that the country has a strong industrial backbone and will eventually emerge from the crisis. Unfortunately, since the beginning of the crisis Italian productivity, already weak in the previous years, has continued to suffer. Luigi Zingales, an Italian economist at the University of Chicago, warned his compatriots that instead of getting angry about the latest downgrade of Italy’s debt by Standard and Poor’s, they should finally get their act together. Based on my exposure to Italy in the past few weeks, I agree.