Eurozone: Italy PM Berlusconi will resign, Greece to announce interim government

Updated On: Nov 09, 2011

Italian Prime Minister Silvio Berlusconi has promised to resign, stepping down after Italy's parliament accepts controversial economic reforms aimed at stemming the country's debt.

UPDATE: Mr. Berlusconi has also promised not to stand for re-election, and reports say he could resign within days.

This makes Mr. Berlusconi the second leader of a debt-stricken European country to announce his resignation this week, following Greek Prime Minister George Papandreou.

UPDATE 2: The new unity coalition to replace Mr. Papandreou's government was supposed to be announced on Wednesday, but talks broke down after the country's political parties could not agree on who is to lead the new government.

Italian PM Berlusconi to Resign

Speaking on television, Mr. Berlusconi said he would step down after Italy's parliament accepts a raft of economic reforms that he's proposed. These are expected to go before parliament in about two weeks' time.

His announcement follows a vote in parliament on the budget in which he appeared to lose his majority. Both allies and opponents have been urging Mr Berlusconi to step down as Italy's debt crisis grows.

Borrowing rates have shot up in recent days, raising concerns over whether Italy can service its debts. Italy actually has relatively low debt compared to other countries - €1.9 trillion (US$2.6 trillion). But Italy also low average growth rate of 0.75 percent, trailing behind other European economies, and the combination has raised fears it could be the next country to fall in the debt crisis.

By agreeing to step down, Mr. Berlusconi aims to win approval from Italy's opposition on controversial stability and austerity measures. These include reforms which Eurozone leaders have requested, trimming debt and spurring growth in an economy that has trailed the European average for more than a decade.

Before Berlusconi resigns and the country begins talks on a new government, both houses of parliament must approve the budget plan.

Report: Italian crisis: Silvio Berlusconi vows to resign [BBC, 8 Nov 2011]

Berlusconi's Downfall

Mr. Berlusconi is Italy’s longest-serving Prime Minister. The 75-year-old has won three elections, governing for half the 17 years since he entered politics in 1994. He has survived more than 50 confidence votes, but has recently become mired in a series of legal and sex scandals.

But it was not opposition action that cost Mr. Berlusconi his majority in parliament, but rather the economy. His coalition has crumbled under pressure from the bond markets, with the crisis in Greece shining a harsh light on the cracks in Italy's economy.

During his long political career, Mr. Berlusconi has repeatedly promised to pass measures that would boost competitiveness, attract foreign investment and open the job market to young unemployed Italians. But actual reforms have been few and far between.

According to a commentary published by TIME magazine, as long as the global economy and European Union remained healthy, these problems could be overlooked. But with Greece and Europe facing crisis, Mr. Berlusconi's erratic behaviour and personal scandals became too great a liability for Greece. Analysts say doubts about Mr. Berlusconi's leadership have directly affected investor confidence in the country.

Although some in Italy found Mr. Berlusconi's antics amusing, he is blamed by many as having personally contributed to a coarsening of Italian culture. Aside from his series of sex and prostitution scandals, the media tycoon also brought a brand of personal patronage to the political scene.

But resigning could mean personal consequences for Mr. Berlusconi, as he has previously escaped multiple criminal charges (including corruption, abuse of office, and prostitution with a minor) by virtue of holding political office. His vast media and publishing empire could also come under regulatory scrutiny,

Yet even stripped of office, Mr. Berlusconi will remain the country's richest man and owner of three of its seven political channels.

Analysis: Berlusconi Says He's Leaving: Is This the End of Italy's Politics of Burlesque?[TIME, 8 Nov 2011]

US stocks closed higher on the news of Mr. Berlusconi's impending resignation, with the Dow Jones up 102 points. The S&P 500 and the NASDAQ also registered modest increases. In Asia, markets climbed after opening on Wednesday, as investors responded well. The euro also strengthened on the announcement.

Analysts said investor scepticism of Italy has been amplified in recent months by the country’s lacklustre reforms. The latest news from Italy is a positive sign that the country is making progress and that Europe in general is tackling the crisis.

But analysts also have warned the positive market tone may be short-lived. It is still unclear what will happen to Italy's leadership after Mr. Berlusconi leaves.

Report: Asia markets climb with banks, miners rising [MarketWatch, 8 Nov 2011]

Beyond Berlusconi

The next government will still face the tough challenge of controlling the country's debt; the new regime must be stable enough to implement painful austerity measures in a country that has been historically hard to govern. Italy has averaged almost a new government a year since World War II.

Italy's election rules and party politics often produce unstable governments that rarely endure a full five-year term, even in the best of times.

Once Italy's parliament passes the plan to implement the austerity measures and Mr. Berlusconi resigns, President Giorgio Napolitano will consult political leaders to  form another government with a broader majority.

It has also been suggested that Mr. Napolitano could also try to build support for a so-called technical government led by a prominent non-politician charged with implementing the economic overhaul and eventually preparing new elections. Former EU Competition Commissioner Mario Monti has been suggested as a potential candidate to lead such a government.

Any new government not chosen through elections would serve out the current legislative term until April 2013. This solution has worked for Italy in the past, with technical governments managing to push through labour and pension reforms in 1993 and 1994.

However, Mr. Berlusconi is against handing the reins over to technocrats, even for an interim period. He insists Italian voters should directly choose the next government in fresh elections.

But new elections could further delay reforms in Italy, including the crucial measures pledged to the EU that also helped convince the European Central Bank to backstop its debt. Under Italian law, elections must be held between 45 days and 75 days after the parliament has been dissolved.

Most of the opposition parties have signalled they would support a broader coalition or a technical government.

Analysis: Berlusconi Resignation Shifts Italy’s Focus [Bloomberg, 9 Nov 2011]

New Greek Coalition Government

Over in Greece, talks are continuing over the formation of a new unity government, after Prime Minister George Papandreou agreed to step down. Discussions have been going on since Monday. The new coalition was supposed to be announced on Wednesday, but parties could not agree on who will lead the new government.

Adding to the confusion, Prime Minister George Papandreou said in a nationally televised farewell address to the Greek people that an agreement had been reached. But later reports indicated talks had broken down.

The new coalition must win parliamentary approval for the European Union's new bailout plan, which includes harsh austerity measures. Unless Greece agrees to the bailout, it will not receive the next tranche of money in mid-December - without the funds, Greece will run out of money within weeks.

The bailout money due in December is part of an existing agreement, but Eurozone leaders say it will be withheld if Greece does not agree to the separate bailout deal agreed last month, which will write-off 50 percent of Greece's debt in return for austerity measures in the country. Greek debts, in return for deeply unpopular austerity measures. The agreement was thrown into doubt after Mr. Papandreou declared that he would hold a referendum on the deal, saying the Greek people should have a say. The referendum was later called off, and Mr. Papandreou agreed to step down.

Report: New Greek coalition 'to be announced on Wednesday' [BBC, 9 Nov 2011]

Report: Greek political parties cannot agree on deal to name new prime minister[Washington Post, 10 Nov 2011]

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