Wednesday, 9 November 2011

So farewell then Mr Berlusconi

Mr Berlusconi seemed - in equal measure - both a repulsive and comical figure. Over the last two years, his personal life has become increasingly bizarre and shameless. Italy deserves better. It is a relief to hear that he is finally resigning. It should have happened sooner, but better now than next week, or some other long overdue moment in the future.

Nevertheless, there is a danger that one reads too much into his departure. When reporting on Italy, the mainstream media have often blended Mr Berlusconi's outrageous personal lifestyle, and his contempt for the Italian public with Italy is rapidly deteriorating economic situation. Likewise, financial markets welcomed the news of the Italian prime minister's impending resignation. The implication seems to be that Berlusconi's exit both lowers public sector default risk and increases the profitability of Italian publicly traded firms - a proposition that seems rather implausible when explicitly articulated.

The Italian economy continues to be in a parlous state and Mr Berlusconi's departure changes nothing. The public sector debt stock sits at about 120 percent of GDP. The economy has barely grown in a decade. Italy is rapidly ageing population. It has a sclerotic and overregulated private sector. Its judicial system is barely functioning. These problems did not suddenly emerge when Mr Berlusconi became Prime Minister. They will not disappear when he finally leaves office.

It takes decades of government mismanagement to build up a deficit of 120 percent of GDP. This number is a ratio comprising of nominal debt and nominal GDP. Notwithstanding the mathematics behind ratios, as a rough approximation, it would take about 24 years for a fiscal deficit of five percent per year to build up a debt stock of this magnitude.

When Berlusconi first became prime minister, the Italian debt stock was already over 100 percent of GDP. His great achievement was to stabilise the debt at roughly the level he inherited when entering office. He didn't improve things much, but neither did he make matters worse.

So farewell Mr Berlusconi, you inherited a mess when you first became prime minister, and you leave a mess for your successor.

Italy remains on the edge of a meltdown.


Michael Fowke said...

He's a wonderful character! I don't want him to go.

jams o donnell said...

Good riddance to the slimebag I say!

davidb said...

Italy has had a particularly difficult time at the hands of Chinese competition. It had an economy of small and medium sized firms in areas such as textiles, footwear and furniture which are now pretty much dominated by Chinese firms. I don't doubt that the Euro has contributed to the problem as Italy used to devalue constantly pre euro, but all those jobs the Chinese do today were once done somewhere else - and Italy was one such place.

Slackerman said...


Interesting observation.