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Italian politics: Jittery Italy

Posted by hkarner - 13. April 2012

Date: 12-04-2012
Source: The Economist

Stockmarkets tumble, and a scandal topples a political veteran

COLD winds blew through Italy this week, and clouds obscured the unseasonably blue skies under which the country had long been basking. Politically and economically, too, the outlook has changed. On April 10th the Milan bourse’s index dived by 5%. Markets fell elsewhere in Europe, but the drop in Milan was the biggest, reflecting among other things fears that Italy’s banks, which bought more than €50 billion ($65 billion) of government bonds during the winter, are perilously exposed to renewed panic in the debt markets. The same day saw the yield spread between Italian and German benchmark bonds exceed four percentage points for the first time since January.

That is not all bad news for Mario Monti, Italy’s prime minister. Last year, fear of a crisis that could force Italy to default on its vast public debts (worth more than 120% of GDP) cemented an unlikely alliance between the three big parties, giving Mr Monti’s government a solid parliamentary majority. Of late, that alliance has needed extra glue.

The centrepiece of Mr Monti’s legislative programme is a reform of Italy’s notoriously restrictive labour laws, which help to produce a woefully low employment rate (see chart). The bill, which began its parliamentary journey this week, has been rejected outright by Italy’s biggest trade-union federation, the CGIL. That stance has put the leaders of the centre-left Democratic Party (PD) between the rock of their historic ties to organised labour and the hard place of support for the government. To ease their pain, the government said on April 4th that one of the most fiercely contested parts of the bill would be watered down: judges will retain the power to order reinstatement (and not just compensation) for workers dismissed for economic reasons.

That prompted bitter criticism from the employers’ leader, Emma Marcegaglia. Mr Monti in turn criticised her for adding to the fear in the markets. That was unfair. If anything in Italy had fostered alarm, it was Mr Monti’s concession on labour reform. But the change may nevertheless have been worth making. If tensions between the PD and its main rival, the People of Freedom party, can be kept within limits and their unnatural alliance extended, Mr Monti will have bought his government time; it may even survive until next year’s election. Amid macroeconomic uncertainty, political stability is no small prize.

That has been even truer since April 5th, when Umberto Bossi resigned as head of the Northern League, the regionalist-cum-separatist movement he founded in 1991, which held the balance of power until the fall of Silvio Berlusconi’s government last year. The end of Mr Bossi’s autocratic reign came amid claims by prosecutors that taxpayers’ money allotted to his party had been spent on its leader, his family and his closest associates (none of whom is under investigation, and all of whom deny wrongdoing). The League’s treasurer is being investigated (on suspicion of fraud, embezzlement and money-laundering); he also denies wrongdoing.

The scandal is unlikely to go away. Among other things, prosecutors are looking into alleged links between League officials and mobsters from southern Italy, and a string of puzzling overseas investments, including one in Tanzania. This is acutely embarrassing to a party that has always prided itself on its decency, and which aspires to cut northern Italy off from the crime and corruption in the south.

The League’s troubles, which could yet escalate into a party split, might help Mr Monti, as the party is his fiercest critic. But tremors that shake Italy’s political landscape seldom come singly. This one could be an isolated jolt. Or it could be the prelude to an earthquake on the right.

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