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The World Economy May Be at Risk, but Not Because of Washington

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It looks like the US government isn't the only one that's dysfunctional right now; Berlusconi has triggered the collapse of the Italian government.

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Fallout from the US government shutdown has everyone worried that the global economic recovery could stall. But it turns out that the United States isn't the only country that has a dysfunctional government.

Former Italian Prime Minister Silvio Berlusconi triggered the collapse of the Italian government when he pulled his ministers out of a grand coalition that he and his party had formed with current Prime Minister Enrico Letta. In doing so, he called for new elections.

Berlusconi's move came just weeks before he will be forced from the political spotlight due to a conviction for tax fraud. He declared the coalition's demise in a way that's fitting for the neverending spectacle of Italian politics. In a headline in Il Giornale, which the Berlusconi family owns, he declared, "Who is not with me is out."

Later, according to the Financial Times, he told Parliamentarians from his party, "We must remain united," then admonished them to "wash their dirty linen at home."

Now no one is sure what's going to happen in Italy, which has the eurozone's third largest economy. If new elections were held, it would show Italy's instability and inability to govern, sending shockwaves through world markets. It also would signal Rome's inability to institute austerity reforms Italy needs to balance its books.

Berlusconi's reason for the revolt is that Letta's economic plans aren't working. Austerity remains very unpopular in Italy, which has unemployment of 38% and is stuck in its longest recession ever.

But Italy's problems won't be solved quickly. Structural reforms to modify the very nature of its economy are needed. The changes will take decades, not months.

But the 77-year-old Berlusconi doesn't have decades left. In fact, he only has a few weeks before he's expected to serve a year's house arrest. He has vowed to stay in politics.

His latest move shows that his fate and the fate of the Italian economy go hand-in-hand. This means that a man better known for sex parties than good governance holds the fate of the Italian economy, and the entire economy of the European Union, in his hands.

The good news is that some within his own party, sensing the damage he could cause, are considering abandoning him and sticking with the coalition. If this happens, it would be a huge rebuke of Berlusconi and a big win for Italy.

But even if this occurs, Berlusconi has proved that he will not leave quietly. He has just days before he'll disappear from public view. But those days might be enough to send Italy into a tailspin, taking the European Union with it.

Editor's Note: This article by David Francis originally appeared on The Fiscal Times.

For more from The Fiscal Times:

Fiscal Fiasco: Will a Shutdown Cause a Stock Meltdown?

Bigger Risk for Investors: Congress or Complacency?

Legg Mason's Bill Miller: Eliminate the Debt Ceiling


Follow The Fiscal Times on Twitter @TheFiscalTimes.
No positions in stocks mentioned.
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