Italy: On the Brink Again?

So far, this summer in Europe, as far as financial markets are concerned, is proving to be a far cry from last year’s panicky crisis mode.

The eurozone is still intact. The latest available data point to a stabilization of the economic situation or, better still, a return to growth later this year. Mario Draghi’s promise to do whatever it takes has been effective and is still credible. The president of the European Central Bank (ECB) truly appears to have silenced the doomsayers.

Yet, having visited some of the weaker frontlines in this long battle to save the euro — and Europe — over the past weeks, there is reason for concern.

Yes, unemployment numbers in Spain may be on the mend, ever so slowly. But in other countries, such as Portugal, the momentum on advancing structural reforms is slowing down considerably.

My own biggest worry is Italy. Everybody would do well to take a closer look at the Italian political calendar, or risk finding themselves in for a rude surprise.

On the surface, the absence of market pressures on sovereign bonds is proving to be a very tempting opportunity for Italy’s discredited political class to resume playing games with the future of the country.

Italy could very well be on the brink of renewed political turbulence. On July 30, the Corte di Cassazione, Italy’s Supreme Court, will issue the ruling on one of the innumerable trials that involve former Prime Minister Silvio Berlusconi.

This time the controversial billionaire-turned-politician will not be able to appeal the verdict. It will be the court’s final word.

Despite no lack of flexing his muscles via the media outlets he owns as well as his political party, the flamboyant politician is — understandably — terrified by the prospect of a conviction. The former prime minister could be forced to serve a prison sentence, even though that is an unlikely outcome.

However, if Berlusconi were to be barred from political office — a much more likely outcome — his fate would be sealed. His party, the Freedom Party (PDL), would find itself with no leader.

Berlusconi’s possible heir, Angelino Alfano, who is currently serving as Minister of the Interiors in a grand coalition with the archenemies of the center left Democratic Party (PD), is extremely weak.

Berlusconi’s party aside, the presumed fresh force in Italian politics, the Five Star Movement (M5S) of former comedian Beppe Grillo, is also greatly weakened. The anti-establishment party has basically done itself in, due to a constant barrage of critical press reports and many mistakes of their own making.

In other words, what seems from the outside like a stable situation in Italian politics is deceptive. Things could unravel quickly. The Partito Democratico (PD), the center-left party and the leading force in the current coalition government, could be tempted to seize the opportunity and force snap elections.

Such a call for an early vote could also short-circuit the leadership challenge within the PD itself. That battle is pitching the 38-year-old mayor of Florence, Matteo Renzi, against the party’s old establishment. The old guard has no intention of handing the party to the young mayor.

The power struggle within the left is at least as big and vicious as the ongoing war against Berlusconi. All this makes for a toxic mix, in the midst of which Enrico Letta, the current prime minister, is trying to navigate.

Letta’s government has taken some minor steps toward addressing some of the structural weaknesses of the Italian economy. This includes simplifying the bureaucratic maze companies face when trying to do business in the country.

However, the political will to do more — which is very necessary to put Italy in a position to realize its full economic potential — is simply not there.

The government is basically powerless when faced with a solid onslaught of deeply entrenched vested interests. Fighting them is so hard because they have fully permeated the political process at all levels.

Faced with this spectacle, Italians are getting angrier and angrier with politicians of all stripes. At the same time, voters seem confused about what to do about it.

While the Italian establishment almost obsessively points the finger at Angela Merkel and her politics of austerity, I found scant evidence of such feelings among regular citizens. According to all the people I talked to, it is primarily Italian politicians who are to blame.

The writing is clearly on the wall for all to see: If the troubled relationship between citizens and politicians deteriorates further, enforcing any policy will become even harder.

The latest data point to very troubling developments. Tax evasion is going up — instead of going down. I have heard of Italian entrepreneurs who, instead of rolling up their sleeves, prefer to use companies’ funds to refuel their personal yachts.

When questioned by their own employees, they replied that there was nothing to worry about and claimed that they were too small to come under the scrutiny of tax authorities.

Such carelessness and small-mindedness can do an entire country in, especially considering that this is supposed to be the entrepreneurial class. Calling them the “conniving class” would get much closer to the sad truth.

When questioned by international bankers, representatives of Italian industry resort to the standard claim — that the country has a strong industrial backbone and will eventually overcome its current difficulties.

Unfortunately, this is not borne out by the numbers. Since the beginning of the financial crisis, Italian productivity — already weak in the previous years — has continued to suffer. Weaker companies are being swept away and stronger ones have difficulties funding themselves.

Luigi Zingales, an Italian economist at the University of Chicago, essentially warned his compatriots that Italians love to shoot at the wrong targets, to their own great detriment.

Instead of getting angry about the latest downgrade of Italy’s debt by the rating agency Standard and Poor’s, they should finally get their act together. Based on my time in Italy in the past few weeks, I agree.