The international weekly surveys the damage done by the country’s last election – in which the two top vote-getters were the clownish and corrupt former Prime Minister Silvio Berlusconi (30 percent) and Beppe Grillo (25 percent), a stand-up comedian — and wonders if this is a mortal blow for the common European currency:
[W]hoever is chosen, and whatever government is cobbled together, Italy will struggle to avoid a fresh election later this year. It would be better if that election were fought with new political leaders and under a new electoral system that makes a repeat of today’s gridlock less likely.
In the meantime, the worry is of no progress with the reforms that are desperately needed to restore vitality to an asphyxiated economy. To do nothing, as Italy’s voters seem to wish, is not the answer to the country’s problems. Italian GDP per head has actually shrunk during the euro’s first 13 years of existence. This performance has little to do with a lack of demand caused by excessive fiscal austerity, as some euro critics loudly claim. It has everything to do with year after year of steadily rising labour costs and falling productivity, which have undermined Italian competitiveness and exports. If Italy’s government cannot regain lost competitiveness and reignite growth through greater liberalisation of its labour and product markets and reforms to the country’s legal and welfare systems, the economy will suffer, and youth unemployment will climb even higher than today’s 36 percent.
This is dangerous. It is hard to see Italy remaining in the single currency in such dire straits—and equally hard to imagine the euro surviving if it falls out. Italy is the euro zone’s third-biggest economy and, although its budget deficit is quite small, it has the biggest stock of public debt (at almost 130 percent of GDP). This makes it too big to bail out. (Emphasis added.)
But without growth, Italy will not be able to service its debts. The possible pattern is clear: a series of crisis meetings, a few half-hearted efforts at reform to buy off Germany’s Angela Merkel, not enough growth, too much austerity, and then another crisis. The euro survives, but at immense economic cost. The euro zone becomes Japan.