All roads lead to Rome as crisis deepens

ANALYSIS:ANOTHER DAY, another dance of death. As Silvio Berlusconi struggles for survival, the EU authorities can only watch as the political melodrama in Italy aggravates the tension in the euro zone.

The travails of the storied playboy prime minister never fail to captivate. The problem now, however, is that Berlusconi’s antics and those of his squabbling supporters lie behind a drastic escalation in the debt crisis.

European finance ministers were in Brussels again yesterday for a second day of talks on the expanding debacle. They made little headway. The main event was in Rome and, to a lesser extent, Athens.

“People were kind of hesitant and awaiting developments in Greece and in Italy because there’s a feeling [that] whatever economic and financial decisions need to be made can’t be really made until the political logjam is released in one way or another,” said Minister for Finance Michael Noonan.

These are dangerous days. Whether Berlusconi goes immediately or flails around for another few days may be already moot. If it can be taken as a given that he will not be in office much longer, the more relevant question is whether his successor can win back precious market confidence.

The answer will have a crucial bearing on how the crisis plays out in the coming weeks. To presume that everything will come right eventually may be too optimistic. The more the crisis expands, the more difficult it becomes for political leaders to confront it.

The situation is worsening rapidly. Yields on Italian 10-year bonds are already approaching 7 per cent, a level at which it would be impossible for the country to raise the €300 billion it needs to borrow in the next year to refinance maturing debt. This is an appalling vista for Europe, which is now confronted with the not-so-distant prospect that the third-largest country in the single currency could run out of cash without external aid.

Three immediate problems arise, to say nothing of the potential for chaos worldwide if a supposedly stable advanced economy capitulated to crisis.

First, there simply isn’t enough money in Europe’s bailout fund to take Italy out of private debt markets for anything like the time needed to put its fiscal house in order. Second, it will be weeks before the fund can insure the debt of stricken countries. Third, the European Central Bank is desperate to stop its emergency bond-buying campaign.

All of this explains Europe’s subtle and not-so-subtle pressure on Italy to quickly mend its ways.

Italy is in the full glare of the markets. The more Europe demands action and the longer Berlusconi prevaricates, the weaker he becomes. He produced an austerity plan many weeks ago but has wavered ever since as his coalition crumbles.

True, the ECB has been buying Italian bonds since August. At one level, the relentless upward spike in Italian yields raises questions as to the power of the Frankfurt-based institution to seize the initiative.

More plausible, however, is the perception that the ECB has placed limits on its interventions deliberately to ensure Rome remains under pressure. Whatever about the bank’s moral qualms about bond-buying, it remains open to it to unleash the full force of its armoury to increase radically the amount of money it spends on Italian bonds. Such a move might have the desired effect of reducing Italian bond yields, but it would hand Berlusconi a free pass. He would be at liberty to argue that there is no need to pursue austerity. That, however, would store up problems for another dire day.

Remember also that no-one in the EU’s top echelon is better-placed than ECB chief Mario Draghi to assess the true state of affairs in Rome. He was the Italian central bank governor up to nine days ago and co-signed an August ECB letter to Berlusconi in which the prime minister was told to take decisive action immediately.

There is no easy way out here. Scarcely a fortnight has passed since EU leaders unveiled a new “grand bargain” plan finally to assert control over the crisis but the emergency intensifies by the day. As Noonan prepares a most painful first budget, multiplying problems in the outside world cast a pall over the effort.