ROME, 9 July 2004 — Assailed from every side, Italian Prime Minister Silvio Berlusconi is facing his most difficult days since coming to power three years ago. Forced to sack his finance minister last week by coalition allies who threatened to bring down the government, on Wednesday he suffered the humiliation of seeing Standard and Poor’s rating agency cut Italy’s sovereign credit rating to AA-, the lowest in western Europe. It was the first time that a Eurozone country has suffered a downgrade since the introduction of the euro in 1999, and came only days after Berlusconi took charge — only temporary, he claims — of the Finance Ministry.
Berlusconi must deliver long promised tax cuts worth 12 billion euros if he is to swing public opinion behind him again and win the next election, due in spring of 2006. But if tax cuts are not to lead to a further ballooning of the budget deficit, and a further slump in Italy’s rating, they must be matched by deep cuts in public spending.
Berlusconi and his coalition allies have been bickering for months over where those cuts should fall. Yesterday Berlusconi held his first Cabinet meeting since Tremonti’s departure and is determined to ram through a 7.5 billion euros package of spending cuts to keep the budget deficit within EU limits. It is unlikely to be plain sailing. Other problems are piling up. On Wednesday it was announced that Berlusconi’s grown-up children, Piersilvio and Marina, have been put under investigation in Milan on suspicion of money-laundering, in a case in which Berlusconi himself has already been accused of fraud. The case involves the purchase of TV rights for American films in the early to mid-90s by Mediaset, the family company which owns his television channels and of which Piersilvio is vice-president. Marina works for the family’s financing arm, Fininvest.
The EU also on Wednesday announced it was suing the Italian government for its consistent policy of buying Italian-made Agusta helicopters without putting the order out to tender. And the day before Berlusconi learned that the EU had rejected the plan he cooked up last winter to bail out Italy’s top football clubs, most of which face bankruptcy. The plan allows clubs to spread the depreciation in value of grounds and facilities over 10 years instead of the normal three, and has allowed Berlusconi’s own side, AC Milan, to cut its deficit as of June 30 from 247.30 million euros to 29.50 million euros.
But on Wednesday the EU’s Commissioner for the Internal Market Frits Bolkestein ruled that the new law “violates the EU’s accountability directive” and cannot be considered a one-off measure. He warned that if the problem was not rectified the EU would sue Italy.
But Berlusconi’s central and critical problem is the economy. “Berlusconi is blocked in an ideological impasse, says Federico Rampini of La Repubblica. “If he doesn’t keep the promise to cut taxes contained in his ‘Contract with the Italians’” — a winning stunt in the last general election — “Berlusconi knows that he is signing the end of Berlusconism. But this tax cut cannot be achieved. If he fakes it, he will merely be removing money in advance from the same pockets of the Italians.”
Over at Corriere della Sera, Francesco Giavazzi believes the tax cut could be achieved, but only by transforming the government’s performance. “There’s only one way: To accompany the tax cut with all the things that were in the “House of Liberties” manifesto and have not been done. Accelerate privatization, liberalize the markets, starting with professionals, bring in new norms on savings and a new law for the Bank of Italy: In other words, balance the tax cut with a Thatcher-style shock.” But this seems a long way from happening.
