If Greece was the warm up act, the main event has now definitely begun, Alastair Stephens looks at the background to the fall of Silvio Berlusconi.

In the end it was not one of his numerous scandals that did for Silvio Berlusconi but the failure to bend to the will of the markets and the ECB (European Central Bank) and carry out their bidding.

After his coalition government lost its majority on Tuesday he committed to resigning as soon as economic reforms connected to the budget are passed. He has also stated he will not be standing again for the post of Prime Minister.

His resignation was supposed to bring some calm to markets, but it has in fact just agitated them further and marks another stage in Europe’s worsening crisis.

The eye of the economic and political storm has been moving from Greece to Italy for some time now. In many ways the Greek crisis has of late become about the ever more desperate attempts to arrest the crisis there and prevent its contagion infecting Italy.

Too big to bail out

Italy is the third largest economy in the Eurozone but also has the largest debt approaching €1.9 trillion, nearly 10 times larger than the Greek debt and some 120% of Italian GDP. It may not hit the same heights as Greece’s debt ratio of 190% but it is still much larger than any other major European economies which are in the range of 70%-85%.

Italy is widely seen as being too big to be allowed to fail, however it is also too big to bail out if the markets stop lending to it. And that is what has been happening over the last few months.

Yields on Italian government bonds, the rate of interest the markets want to lend money at, have been going up and up and has seemed to be heading for the same unsustainable levels at which other countries needed bailing out.

It is the failure of efforts to arrest this flight from Italian bonds that led to Berlusconi’s ousting.

In July an austerity package worth some €40 billion of spending cuts, promises of privatisation and labour market reform was passed.

ECB intervenes

The markets however were not satisfied and pressure on Italian government bonds continued. In August the ECB started buying bonds in order to bring their down price. Something it had said it would not do.

By strange coincidence the Berlusconi government then brought forward yet another austerity package worth another €40 billion in cuts and yet more neolibeal reforms. This provoked the first general strike in five years.

It was widely believed that this was not just some strange coincidence and that it was as a result of pressure from the ECB, something denied by both parties. There was rumoured to be a letter which set out in “humiliating” detail what the government had to do in return for the ECB protecting governments bonds from the full fury of the market. Such alleged orders were widely interpreted as vote of no confidence in the ability of Berlusconi (distracted by his numerous scandals) and his government to deal with the growing crisis.

Then at the end of September the rumoured document was leaked to the Milanese newspaper Corriere della Sera. The letter, marked “strictly confidential”, was written by Jean-Claude Trichet (the outgoing head of the ECB) and Mario Draghi (his incoming counterpart) and personally addressed to Silvio Berlusconi. It set out in some detail the measures they thought “essential to restore the confidence of investors.”

It was a recipe straight from the structural adjustment programme cook book: privatisation, wage cuts, pension reform and the scrapping of employment rights.

That their demands had been so loyally followed, rather than strengthening Berlusconi, caused ever more confidence to slip away from the government and exacerbated divisions within it. Arguments between leading figures within the government, were becoming harder to gloss over as Berlusconi, who seemed to want to pretend that there was no real crisis clashed with Giulio Tremonti, his finance minister and his coalition partner Umberto Bossi, leader of the far-right and regionalist party the Northern League. The former wanted to press ahead with neoliberal reform and the latter, though not against reform as such, wished to protect his voting base, especially from pension reform.

Political crisis

The growing economic crisis exploded into a full blown political crisis in mid-October when a usually routine vote on the government’s previous year’s accounts was lost. Berlusconi put it down to accident of some MPs being away. It escaped no one’s notice however that amongst the absentees were Tremonti and Bossi. Berlusconi called a vote of confidence which he narrowly won. But something had obviously changed.

The markets were increasingly casting their own vote of no confidence in his administration as the world’s three leading credit ratings agencies Standard and Poor’s, Moody’s and Fitch downgraded Italy’s bonds “with a negative outlook.” All listed amongst their reasons for doing so a lack of government action to implement neoliberal reform.

The markets and much of Europe’s elite had decided that Berlusconi was not capable of forcing through the painful cuts and reform that they consider necessary. Calls for him to go started to become ever more strident. The attitude to his leadership was no better illustrated than by an incident at a meeting of the Council of Europe. When Merkel and Sarkozy were asked by a reporter if they had confidence in Berlusconi’s commitment to carry out reforms they both just smirked at each other and Sarkozy barely avoided doing what is known on the stage as corpsing. It was in terms of European diplomacy an almost unprecedented act of disrespect.

One humiliation after another was then heaped on Italy’s government including being forced by Sarkozy and Merkel to bring to the EU summit a 15 page “letter of intent” listing in great detail and with deadlines a crash program of neoliberal reform.

Berlusconi was then forced to agree to IMF inspectors making quarterly visits to check that the promises were being followed.

With confidence in his government evaporating like morning dew Berlusconi then helped put yet another nail in his own coffin with his own “Crisis, what crisis?” moment. He told a press conference that “The life in Italy is the life of a wealthy country: consumption hasn’t diminished, it’s hard to find seats on planes, our restaurants are full of people.” Something that might not neccesarily make the the 30% of Italian young people who are unemployed feel better about their lot.

By the start of November an international campaign to oust Berlusconi was in full swing with even the FT weighing in with an editorial, much reported in Italy, that directly addressed him “In the name of God, Italy and Europe, go!”

Even normally supine MPs of his Freedom People party strirred themselves into rebellion, some defecting to the christian democratic party the UDC. The writing was really on the wall when it became clear that amongst their number was Gabrielle Carlucci a former TV presenter and ultra-loyalist. The betrayal of this particular protogé seemed to cut deepest as he labelled her Gabriella Iscariot.

So when the routine vote on the national accounts came up again it became a test of strength for the coalition.

The opposition managed to unite to call for his resignation but decided to abstain so that the accounts could go through (without which a new austerity budget could not be passed).

With no votes against the measure the accounts passed but the 308 votes in favour clearly showed that the government had lost its majority in the lower house of parliament.

Unelected Governments

Berlusconi was forced to tender his resignation to President Napolitano. What happens next is open to question. Even an attempted comeback by Berlusconi, despite his promise not to stand again for prime minister, is not out of the question. It is unlikely though given his unpopularity with the markets. When at the weekend rumours went around that he was resigning markets jumped, they fell again when he denied it.

The chaos of Italina politics and the complete political collapse of the so-called centre-left means that nothing can be ruled out.

It is the right who are now calling for elections and the opposition Democratic Party that seems to be moving towards backing a government of ”national unity” or a “technical” government to take “unpopular” decisions as president (and former Communist!) Napolitano called them. The most likely candidate to lead such an administration is Mario Monti an economist and former EU commissioner (who has just been made a life senator).

This would not be first time that Italy has had a government of civil servants and bank officials. Three times in the 1990s there were such administrations. The one led by the former Bank of Italy head Carlo Azeglio Ciampi is still seen as one of the more successful governments of the last two decades. It took the “hard decisions” needed to get into the Euro!

Unelected governments forcing through massive programmes of unpopular change without consulting the electorate does of course seem to have become the ECB’s option of choice.

Yet none of this seems to have brought the crisis under control. In fact it is just seems to be ever deepening. Yields on Italian bonds have gone above 7%, a level considered “unsustainable” and shares are tumbling around the world. If Greece was the warm up act, the main event has now definitely begun.