Earlier this summer I gave some of my impressions on the economic situation here in Italy. Much of the big economic news this summer was about Greece, but in reality, it was never about Greece. Greece could fail every year for all eternity, and it would register as little more than a blip on the world's radar. It was always about Italy- maybe Spain- but certainly Italy. Greece (and Portugal and Ireland) were always just a testing ground for what would happened if Italy starts to get stretched too thin. After Greece's latest bailout, the EU created a bailout fund designed to do two things: support European banks after their write-off of Greek debt, and attempt to provide support should something happen to Italy. Volumes could be written about just that first objective, let's just say this bailout will probably be a drag on the entire Euro area economy. But the second one, was designed to reassure the markets about Italy in particular. It's hard to say what their legitimate hope was, a permanent cure or just a time-buying measure, but it looked like big stuff. Lots of zeroes and the like to support even the bigger troubled economies of Italy and Spain.
The latest reactions in the markets have been nothing short of disastrous. Italy's borrowing costs were around 5.5% when the latest "Ultimate Solution" was being cooked up, earlier this week it hit a high a of 7.2%, an increase of 31% in about a month. Disaster in the making essentially. There could only be three reasons why the markets decided to abandon Italy so remarkably: They didn't like something about the Greek bailout, and they hoped new European Central Bank (ECB) President Mario Draghi was more willing to get his hands dirty to help the situation more than his predecessor was, they were scared Berlusconi would never leave.
But Berlusconi has gone now, and indeed, Italian debt got some small relief on Thursday and Friday. I think it is a little unfair to suggest that Berlusconi was the problem in Italy. His finance minister, Giulio Tremonti, always did his best to keep Italy above water. Not that Silvio appreciated him much for this, it was rumored that the two spoke to each other little or not at all during the last tumultuous few months. I think the market's fears, if rational, were more based in a concern that there would be some (unpredictable) kind of revolt against a Berlusconi who had clearly outstayed his welcome in Italy. The markets were demanding austerity measures that would be very unpopular, and if these measures were coming from a man as unpopular as Berlusconi himself, well, who knows what might snap within Italy.
But as of this weekend, Silvio is gone, and the markets have their wish as a technical government including essesntially all parties except Berlusconi's allies the Lega Nord. The new Premier will be Mario Monti, a man I believe relatively unknown to most Italians. He is a former professor who has made his career as a very high level EU bureaucrat. As such he isn't tainted by party politics, and seems the ideal man for the job. His government will undoubtedly do the cuts that must be done. For how long he will remain in place is unclear, elections aren't scheduled until 2013 at the moment.
But there will be great hardship to come here in Italy, and a certain part of me hopes the Lega Nord goes rogue, and whips up a significant anti-EU sentiment in Italy. It has to do with those other two reasons for the run on Italian credit I mentioned before: this Greek bailout, and what the ECB is up to. I wanted to lead with the lighter reading before encouraging you all to roll back your sleeves and dig in to unpleasant world of Economic theory and thought experiments. It won't be so bad.