Could Berclusconi really stage a comeback?

10th December 2012

Exit Mario Monti stage left. Re-enter Silvio Berlusconi stage right.

It would certainly make good theatre, but the announcement that Italy’s technocratic Prime Minister Mario Monti is to step down will not have made very pleasant news for the eurozone’s leaders and officials nor even for the government in the UK.

Yet they are more likely to be haunted by the spectre of the supposedly embattled, beleaguered former Prime Minister Silvio Berlusconi planning a comeback.

All this is despite Berlusconi's tax fraud conviction and an ongoing trial in which he stands accused of procuring the services of an under-age prostitute in one of the now notorious parties.

Berlusconi’s return would certainly give bond markets the jitters, coming at a time when resolute action from the European Central Bank had brought down borrowing costs and led some to suggest we are at least approaching the end of the beginning of the eurozone crisis.

Monti is leaving office earlier than the agreed April. He will depart when the current budget law is passed with an election expected in February. Berlusconi’s People of Liberty party will also support that law but has otherwise withdrawn support. Italian shares fell and bond yields rose today as the BBC reports.

Part of the issue with Italy is that despite being stigmatised as one of the PIIGS, i.e. Portugal, Ireland, Italy, Greece and Spain, it is also one of the largest economies on the world in terms of GDP, often vying with the United Kingdom in terms of size. The size of the Italian economy is often forgotten as commentators fret about the West's relative decline. 

But while the south of Italy has always struggled economically much of the north of the country boasts strong, and sometimes even world beating manufacturing and other SME businesses. The last decade is seen as one of stagnation and these firms have lost some ground to Chinese and German firms, but it is still a huge country economically which would be eye-wateringly expensive to bail out.

Were Italy to turn its back on the reformist direction set by Monti, the implications could be severe.

Fund manager view

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