Over the past few days, Italy has promptly re-emerged as a main cog in the illusion that Europe is a well-greased machine (yes, we know, funny) after it became clear that the country continues to refuse to implement any actual austerity measures following the requirement to do just that months ago when it got access to the ECB's sterlizied bond monetization scheme. In fact it got so bad that yesterday the entire Italian government was rumored to be on the verge of collapse as it was once again unable to reach a resolution on what the EU demands are prompt actions taken to raise pension and/or retirement age. According to the Telegraph, Italy may have found a compromise, one which actually ends the regime of Berlusconi... but not yet. Telegraph reports that Silvio Berlusconi has reportedly drawn up a "secret pact" under which he will resign in December or January, paving the way for Italy to elect a new government in March. "The embattled prime minister made the deal with his key coalition ally, Umberto Bossi of the devolutionist Northern League, in return for Mr Bossi's support for pension reforms, according to unconfirmed reports in two Italian newspapers – La Repubblica and La Stampa. Italy is under huge pressure from the European Union to reform its pensions system and extend retirement ages as part of a plan to rein in its enormous public debt and revive its moribund economy." "Don't make a fool of me in Brussels, and I promise that we'll go to elections in March," Mr Berlusconi told the Northern League leader, according to La Repubblica." This would all be great, if only for one small snag: the "plan", like everything else in Europe, is worthless. The FT reports that the compromise agreement "lacks specifics and risks falling short of what eurozone leaders have demanded ahead of Wednesday’s summit in Brussels....In the end, Umberto Bossi, the fiercely eurosceptic leader of the federalist League, made minor concessions that would raise the general retirement age to 67 years by 2026, but rejected changes to Italy’s length of service pension system that allows many workers to retire at the age of 61 with 35 years of contributions. Even Mr Bossi did not sound hopeful that the proposals would go down well in Brussels. In the past he has said he “doesn’t give a damn” about pressure from Europe over Italy’s pension system." He may change his tune once BTPs drop under 90 and go bidless.
In the meantime, the political atmosphere in Italy is about to go from bad to worse:
he has always batted away demands for his resignation and has repeatedly insisted that he will continue governing Italy until the end of his five year term in 2013.
Reports that his resolve may be crumbling, whilst not confirmed, will only add to the febrile political atmosphere as Italy struggles to convince the euro zone that it is up to the task of shoring up its economy and tackling its debt.
Mr Berlusconi has spent an intense two days hammering out a "letter of intent" to the EU on what Italy will do to reform the stagnant economy. Its public debt of 1.8 trillion euros is equal to nearly 120 per cent of GDP.
Mr Bossi said on Tuesday night that the coalition had reached agreement on reforms but that it was up to the EU to decide if they were enough. "In the end we have found a way. Now we will see what the EU says."
But he expressed doubt over whether the government would survive until 2013.
Unfortunately for Italy, unlike Europe, it does not have the luxury of delaying until eternity. From the FT:
Italy’s ability to service its €1,900bn public debt is dependant on continued support from the European Central Bank. The ECB, which began buying Italian bonds in early August to keep interest rates sustainable, set out a list of growth-promoting reforms that it urged Mr Berlusconi to put into legislation by September 30.
That deadline has long passed and, according to media reports, the 15-page document in Mr Berlusconi’s hands contains no timetable for implementation of what appears to be a list of commitments that falls short of those demanded by the ECB and the EU.
Corrado Passera, chief executive of Intesa Sanpaolo, a leading bank, said he was “disappointed” at the outcome. “In the situation we are in, I expected an economic programme that would be agreed by everyone and not just unconfirmed suggestions to take to Europe,” he told reporters.
A front-page commentary in Italy’s main business paper, Il Sole 24 Ore, which has previously urged Mr Berlusconi to resign, said it was “humiliating” to see how a “sketch on pensions” could be thrown together in 24 hours with the sole objective of placating Europe but with such weak content because of resistance from the Northern League.
Never a dull day in Europe.