On to The Next Crisis
Just as Europe seemed to be pulling back from imminent crisis - easing pressure on Greece (with a new deal to release a further portion of a bail-out loan to the Greek government), and on Spain (granting further bail-out funds for its major banks) - another, possibly much greater, threat emerged over the weekend.
Former Italian Prime Minister Silvio Berlusconi announced on Saturday that he was withdrawing his party's support from the coalition run for the past year by Mario Monti, an economist, appointed by Italian President Napolitano to head a non-elected government charged with the task of pulling Italy back from near-financial collapse. A technocrat who has implemented a broad range of austerity measures (the retirement age for pension eligibility has been raised, sales taxes hiked, and a property tax on primary residences has been reinstated), Mr. Monti has garnered respect (if not popularity) for so far avoiding the sovereign debt crises plaguing Portugal, Ireland, Greece and Spain. Decades of political instability in Italy seemed to have, for once, transitioned to steady, competent leadership.
But Monti cannot continue governing without the support in Parliament of Mr. Berlusconi's Freedom People party. As for Mr. Berlusconi, his withdrawal of support is designed to hasten an election call - originally scheduled for next Spring - in which he has announced he will run for his fourth term as Prime Minister. Berlusconi was convicted of tax fraud in October (he is appealing), is on trial in Milan for allegedly paying an underage prostitute for sex (he and the woman deny they had sex), and has been the subject of numerous other judicial probes in the past several years. Only two countries -Zimbabwe and Haiti - grew more slowly than Italy under Berlusconi in the decade to 2010. He was finally forced to resign as Prime Minister over a year ago as markets became intolerant of his government corruption and ineptitude (Italian bond yields soared above 7%). Last year, The Economist magazine, in assessing his record, described him as "the man who screwed an entire country". Berlusconi insisted this weekend that he is running "out of a sense of responsibility", and "out of desperation" for lack of an alternative.
New political instability in Italy - Europe's fourth-largest economy - could roil markets - and not just in Europe - as they open tomorrow morning. Watch for spreads between German and Italian bond yields to widen dramatically, and for pressure on the euro to re-emerge.