from the New York Times
By RACHEL DONADIO
Published: November 7, 2011
ROME — With political turmoil still plaguing Greece and descending upon the much larger economy of Italy on Monday, the fate of the euro and market stability worldwide hinged on whether two of Europe’s most tangled and unresponsive political cultures could deal with their tightening fiscal gridlock.
The prospect of a new transitional, technocratic government in Greece, and signs that Silvio Berlusconi’s resilient hold on power in Italy was weakening, did little to reassure investors that either country was prepared to grapple with the deep structural changes that investors are demanding to restore growth and reduce deficits. In both places, it is not only the economy that is on trial, but also the ability of democratic government to make highly unpopular choices.
The crisis gripping Mr. Berlusconi’s government deepened as interest rates on the country’s debt rose on Monday to over 6.6 percent, the highest since the introduction of the euro more than a decade ago and nearing levels that have led to bailouts elsewhere. Financial markets advanced early in the day on word that the prime minister was negotiating his exit, but lost ground after he denied the reports.
In Greece, where political chaos last week threatened to plunge the euro zone into crisis, doubts remained about the capacity of the political class to form a coalition government to push through reforms it has agreed to in return for a financial lifeline. So strong is the distrust that Europe’s finance ministers refused to release the next $11 billion in aid for Greece until the two leading political parties signed a letter affirming their commitment to meeting the conditions of the loan deal reached last month with European lenders.
Greece and Italy have famously complex political cultures, but today they are both driven by a simple dynamic: no established parties want to assume the full political cost of pushing through unpopular austerity measures and changes to the labor market. And they are jockeying for positions in a new political constellation after eventual elections — as well as for greater bargaining power with the European Union.
“It’s a big mess,” said Roberto D’Alimonte, a political science professor at Luiss Guido Carli University in Rome. “I don’t think it’s that the markets are too strong, but that democracy is weak.”
Forceful leadership also now seems to be in short supply. In Greece, Prime Minister George A. Papandreou agreed to step down to make way for a new unity government after his proposal for a referendum on the debt deal cost him support within his own Socialist coalition (and with European leaders). In Italy, some members of Mr. Berlusconi’s center-right coalition would readily bring him down and replace him with a technocrat — Mario Monti, a former European commissioner, is commonly mentioned— but others want elections and a new political formation.
After denying reports about his imminent resignation, Mr. Berlusconi said he would face a vote on a state financing bill on Tuesday that could potentially take down his government, and in coming days would call for a confidence vote on austerity measures meant to quell market concerns about Italy.
“I want to look at those who want to betray me in the face,” he said.
With high debts, vast underground economies, low birth rates and more pensioners than workers, there is no doubt that Greece and Italy need structural changes to survive. But with deeply entrenched political patronage societies, governments in both countries have been unwilling or unable to carry out such changes, which would require striking the heart of their own constituencies.
Italy first proposed those austerity measures — including pension reform, changes to labor laws and privatization of state industry — in a letter to the European Central Bank the same day the European Union reached its debt deal with Greece and promised to pass them by Nov. 15. But the government has yet to draft the measures into a bill, let alone put the measure to Parliament.
Instead, it has been deadlocked for weeks, as the conflicting interest groups within Mr. Berlusconi’s center-right coalition refuse to budge. The powerful Northern League party, for one, has opposed raising the retirement age to 67 from 65.
The center-left opposition ranges from neoliberals to former Communists opposed to changes in labor laws, making it difficult to imagine how it could push through structural changes in a future political order.
In Greece, Mr. Papandreou’s Socialist government has passed radical legislation aimed at cutting the public sector, but implementation has been slow, even as the economy shrinks under tax hikes and wage cuts that are pushing the country to the brink.
It has been struggling to forge a coalition government led by a technocrat that could share the political cost of imposing more austerity. Lucas Papademos, a former deputy president of the European Central Bank, was widely mentioned as the most likely candidate. But his ascension rapidly became mired in Greece’s political swamps, after he demanded a strong voice in naming ministers and a government of more than three months’ duration, reports said.
Throughout the crisis, long-suffering Greek citizens have said that it matters little who is in power, and growing numbers of policy intellectuals are starting to agree with them. Transforming Greece is a task “beyond Hercules,” said Daniel Gros, the Director of the Center for European Policy Studies. “It’s beyond the capacity of a single person, because you need much more to change a country, to change an administrative apparatus, to change political habits.”
But Italy, he added, is different. “There’s enough social cohesion left so that one could do something if you had the right leader,” he said, echoing the view that Mr. Berlusconi’s government had lost credibility and that borrowing rates would drop if he left, as Monday’s events suggested.
In Italy, the government passed some belt-tightening measures in August under market pressure, but few Italians believe the Berlusconi government is capable of carrying them out.
“Reforms? Where? Here?” said Anna Russo, 43, a salaried worker in Rome. “This country is totally incapable and unwilling to implement reforms. I don’t believe any of what they are claiming on TV these days.”
“What really happens is that the middle class gets squeezed between the crisis and their inaction,” she added of politicians. “Salaries stay the same, taxes, V.A.T. and the cost of living rises. How are we supposed to believe them, if they have not shown one time that they genuinely wanted to improve our situation?”
At bottom, the euro zone crisis is a result of imbalances in which weaker countries like Italy and Greece are forced to compete in the same currency with mighty Germany, something that will cause recurring crises even if the current one is fixed, experts say.
“In the longer run, the Euro zone cannot be viable unless something is done to tackle the imbalances that gave rise to the crisis,” said Charles Grant, the director of the Center for European Reform, a London research institute. “Either there has to be a convergence of unit labor costs, via effective reform in the south, or there must be permanent transfer union, with payments flowing from north to south.”
For now, Italy and Greece are eying each other warily and buying time before the European Union can come up with a better strategy to shore up the euro. “In a certain sense, Italy has the advantage that it’s seen Greece,” said Mr. Gros. “And that’s of course not an example that anyone wants to follow.”
Elisabetta Povoledo and Gaia Pianigiani contributed reporting from Rome, and Stephen Castle from Brussels.
