Is Italy’s Opposition out of Options?

A. Lee: Italy’s Opposition, out of Options?

Late on Tuesday night, Silvio Berlusconi announced his intention to resign as prime minister of Italy. After losing his majority in parliament in a key vote on economic policy, even the normally bullish and intransigent Berlusconi realized that his departure was inevitable. Despite weathering a storm of scandals over the past two years—including the notorious “Rubygate” affair—and surviving a dizzying number of confidence motions, his number was finally up.

Berlusconi’s Achilles’ heel was his economic policy. In the face of the European debt crisis, his government came apart at the seams. Although the 2010 budget report required for the implementation of austerity measures was finally passed on Tuesday afternoon, his strategy for dealing with Italy’s mounting economic woes—spending cuts, job cuts, and tax increases—has come under attack from all sides in recent weeks. Confindustria (an Italian business group), the European Central Bank, and CGIL and CSIL (Italy’s major labor unions) have all criticized Berlusconi’s proposals as a recipe for higher unemployment, limiting economic growth, and punishing the lower-middle class. Then, on October 3, Moody’s downgraded Italy’s debt rating, and a week later a first draft of the budget report was rejected by parliamentarians. On Tuesday morning traders began demanding record yields for Italian bonds in a clear indication of falling market confidence in his leadership.

Already weakened by incessant scandals, the economic downturn pushed the prime minister’s popularity to a low of 24 percent. According to some polls published in the week before his resignation announcement, some 62 percent of Italians wanted the prime minister to step down. On October 15, 150,000 demonstrators furious at worsening conditions and Berlusconi’s proposed austerity measures took to the streets, with some hundreds attacking shops, government buildings, and riot police seemingly indiscriminately.

But Berlusconi’s fall was precipitated not by Italy’s center-left opposition, but by rebels within his own coalition desperate for a change of leadership. Only members of Berlusconi’s governing coalition participated in Tuesday’s vote, and only 308 of them supported the motion, far short of the 316 votes needed to guarantee a working majority in the future. Several members of Berlusconi’s Popolo della Libertà (PdL), including a number of former cabinet members, declined to support the government. His major coalition partner, the right-wing Lega Nord, broke over the vote, and its leader, Umberto Bossi, called on Berlusconi to step aside.

Far from leading the charge, the center-left opposition—headed by the Partito Democratico (PD)—abstained from participating in Tuesday’s vote. Although the PD in particular has been outspoken in its criticism of Berlusconi’s proposed austerity measures and has been crowing for his resignation for months, the party declined to oppose the government. In allowing the 2010 budget report to pass without opposition, the PD and its allies have illustrated that they lack a realistic alternative. With Italy staring financial oblivion in the face, this is cause for real concern.

A Historical Failure

In part, this profound political failure on the part of the PD is a consequence of a twenty-year long dilemma at the heart of the Italian center left. To appreciate its nature, it is necessary to go back to the very beginnings of the so-called “Second Republic” and the realignment of Italian politics that led to Berlusconi’s rise.

After the end of the Cold War and the collapse of every major political party in the wake of the 1992-3 Tangentopoli (kick-back city) scandal, the old center-left parties found themselves adrift without a compass. In the late autumn of 1993, Achille Occhetto, a former leader of the Italian Communist Party (PCI), argued that what was needed was a grand alliance of progressive forces, the aim of which would be “to determine progressively a bipolarization of the Italian political struggle in which the forces that currently occupy the center will have to make the decisive choice of whether to stay with the Left or the Right.”

Although Occhetto’s call to action was well received, it quickly ran aground. While all on the center left agreed that a progressive alliance was desirable, divisions appeared almost immediately. When the “Progressive Alliance”—consisting of eight different parties—announced its program in February 1994, the divisions were so pronounced that its leaders were forced to cast its policy positions in exceptionally bland terms to ensure some measure of unity. The extension of political democracy, job creation, economic growth, limited privatization, and improvements in welfare and social service provision were at the top of the agenda, but no clear indication was given as to how these objectives were to be met.

Gradually, the ill-fated Progressive Alliance evolved into a clearer form, first as the “Olive Branch” led by Romano Prodi, and then as the Partito Democratico (PD), which was established under Walter Veltroni’s leadership in 2007. But although the center left’s organizational structure gradually became more coherent, it continued to be hampered by the same old problems. The PD remains a loose confederation of different factions, each offering a different interpretation of “progressive” politics. As Veltroni’s successors, Dario Francescini and Pierluigi Bersani, have discovered, the persistence of internal divisions poses an insuperable challenge to policy formation.

Although the PD is still committed to the original Progressive Alliance’s broad goals, it has continually shied away from more detailed proposals for fear of provoking potentially fatal splits. As a result, it has failed to explain how these goals are to be met without adding to Italy’s already crippling debt burden, or to distinguish itself clearly from Berlusconi’s center-right coalition—a devastating weakness in the face of the worsening economic crisis.

In May the PD was punished in Italy’s administrative elections, especially in areas most severely affected by the economic downturn. In the heavily industrialized city of Turin, for example, the PD’s victorious mayoral candidate saw his share of the vote drop from 66.6 percent in 2006 to 56.65 percent. In Naples—one of the cities worst hit by rising unemployment—the center-left coalition headed by the PD saw support for its mayoral candidate slide from 57.19 percent to a mere 19.7 percent. The confidence vote of October 14 was just one more illustration of this trend.

A European Failure

The failure of the Italian center left to elaborate clear policy alternatives also fits within a broader trend in European politics. It is not just the PD but rather European opposition parties on both the left and the right that have been unable to propose any alternative to sweeping cuts as a solution to the mounting debt crisis.

Perhaps the most striking example is provided by Greece. Although former Prime Minister George Papandreou leads the center-left Panhellenic Socialist Movement, he has found himself in a position similar to the right-wing Berlusconi’s in recent days. Hastening to meet targets to guarantee the next €8 billion tranche of emergency loans from the EU–European Central Bank–IMF troika, George Papandreou’s now defunct government has faced massive opposition.

On the one hand, the EU and IMF have claimed that Papandreou’s austerity measures fall short of what is required. On September 22 Olli Rehn, the EU Economic and Monetary Affairs Commissioner, castigated the Greek government for having failed to “implement fully the measures to strengthen public finances and improve the economy’s competitiveness.” On the other hand, Papandreou’s proposals have met serious resistance both in parliament and from ordinary Greeks. Outraged by rising unemployment, pension cuts, and tax hikes, popular protests have become both more frequent and more damaging. Following the general strike on October 5, thousands of protestors gathered a peaceful demonstration in the capital on October 15, and another forty-eight-hour general strike on October 17-19 culminated in full-blown riots in central Athens. The immediate cause of Papandreou’s fall was his failed attempt to appease domestic critics and shore up support for his sagging economic policy with a referendum, but his resignation on November 7 was the culmination of months of internal and external pressure.

Yet despite its opposition to Papandreou’s austerity measures, the center-right opposition has not propounded an alternative. While the refusal of Antonis Samaris, leader of the center-right New Democracy, to join a coalition government headed by the former prime minister was ultimately responsible for Papandreou’s downfall, Papandreou was only able to withdraw his proposal for a referendum because New Democracy agreed to support his austerity measures in parliament. New Democracy is on the verge of joining a new national unity government and will exert a decisive influence on policy formation within days. There is, however, no clear sense of what—if anything—its participation in government will change.

Spain offers an equally compelling example. The November 20 general election will likely result in the defeat of the governing Spanish Socialist Workers’ Party by the center-right People’s Party. But expressions of popular dissatisfaction with elected politicians of all stripes are gaining prominence at the same time that the gap between the economic policies of Spain’s two major parties narrows.

Spain’s economic outlook is every bit as bleak as Italy’s. Following Standard and Poor’s and Fitch Ratings, Moody’s downgraded Spain’s debt rating from A1 to Aa2 on October 18 and warned of a negative forecast. Spain’s unemployment rate is now 21 percent and in September rose by the largest monthly margin in fifteen years. In recent months the country has nationalized three savings banks amid a liquidity crisis.

Outgoing Prime Minister José Luis Rodríguez Zapatero’s strategy of imposing a constitutional cap on the state budget, making sweeping cuts to the public sector, eliminating corruption, and rationalizing the banking sector has been widely questioned. Throughout the summer the “Indignados” occupying public squares in Spain grew in strength and scope. Their huge demonstrations of early August were repeated on October 15, with more than 50,000 protestors massed in Madrid and upward of 250,000 in Barcelona.

Yet while Mariano Rajoy Brey—leader of the People’s Party—commands a solid lead in opinion polls, his popularity is based mostly on the unpopularity of Zapatero’s government. Committing to EU-agreed targets, Rajoy has announced that he will follow Zapatero’s plan of cutting the budget deficit to 4.4 percent of GDP this year. At the regional level, PP-led governments have already been pursuing an aggressive policy of cutting public-sector jobs, and there is no indication that this will cease should Rajoy be elected. The few novel ideas which Rajoy has suggested—including modest tax cuts for small business and subsidies for new employers—are conditional on economic recovery and thus unlikely ever to be implemented.

Despite their bitter rivalries, Berlusconi and Bersani, Papandreou and Samaris, and Zapatero and Rajoy all seem to agree that it is austerity or nothing.

The Stagnation of European Economic Policy

When viewed against a European background, it seems clear that the failure of the Italian center left to offer a clear alternative to Berlusconi’s austerity measures is part of a broader poverty of economic thought among policy makers. If this is so, the reason lies in the perception that the current European crisis could not adequately be met by a Keynesian response.

Toward the start of the financial crisis that began in 2008, there was a resurgence of Keynesian ideas. That year both James K. Galbraith and Josef Ackermann, chief executive of Deutsche Bank, led the charge against monetarist economics and argued forcefully that only a concerted stimulus package could create the conditions for growth. This notion was embraced by then British Prime Minister Gordon Brown, President Barack Obama, Dominique Strauss-Kahn (at the time the head of the IMF), and Zhou Xiaochuan, governor of the People’s Bank of China.

Yet the scale of the debt crisis in Europe soon prompted a vigorous reaction. Even though measures such as the reintroduction of capital controls and the restriction of global trade imbalances were either considered or accepted by intergovernmental bodies such as the IMF, the Keynesian emphasis on stimulating demand came under attack. By mid-2010, the worsening of the Greek government’s position was evidence for some that European states could no longer afford to entertain hopes of stimulating growth along Keynesian lines. Greece was unable to sustain its own debt, let alone increase its borrowing. In May 2010 G20 finance ministers agreed to abandon deficit-funded stimulus in favor of budgetary tightening, and two months later European Central Bank president Jean-Claude Trichet urged European governments to cut spending drastically. Although some—including European Commission president José Manuel Barroso—remained convinced that stimulus was a valid option, the anti-Keynesians remained in the majority.

On the face of it, it does seem that Keynesianism is ill-suited to resolving Europe’s current woes. However effective stimulus packages may be, it is not unreasonable to argue that Italy, Greece, and Spain simply can’t afford to indulge them. But it is mistaken to believe that Keynesianism has been discredited. There is a growing acknowledgement within Europe that austerity measures are only a stalling tactic. In the short term, cutting budget deficits may make sovereign debts more sustainable, but in the long term, the absence of growth will certainly cause debt crises to recur. There is thus a need to strike a balance between restraining deficit spending and encouraging growth through stimulus.

From this perspective, the weaknesses of Keynesianism are only apparent where its application is limited, and where the imagination of “progressive” policymakers is constrained. Several options for the further translation of Keynesian theory into economic policy are available.

Closer regulation of the banking sector and the extension of capital controls are obvious courses of action for center-left parties to propose. But parties such as the PD might also consider proposing a more modest reduction in the budget deficit to allow for a limited form of stimulus, and permitting more direct government intervention in failing industries. Although this would certainly make further borrowing more difficult in one sense, it would incentivize growth that would, in turn, restore international confidence in Italian bonds. There is a risk that bolstering demand and employment in such a manner might accelerate inflation, but were the introduction of cautious price and wage policies considered, such a danger could be avoided.

Addressing the Historical Failure

It is, however, one thing to say that the PD could consider a return to Keynesian economics, and quite another to say that it could do so without any risks. Any move to elaborate a more detailed and radical economic policy based on Keynesian lines is likely to catalyze a major split in the PD between the liberal and socialist wings of the party. This carries with it political dangers. After May’s disappointing election results, the fragmentation of Italy’s largest center-left party could lead to a further diminution in popular support for its splintered parts. Should a general election be called in the near future (as seems likely), this could effectively strengthen the hand of the center right at the worst possible time.

Yet despite this, Pierluigi Bersani needs to recognize that given the ineffectiveness and unpopularity of Berlusconi’s austerity measures, Italy desperately needs a coherent policy alternative, and that Keynesian economics may represent the best available option. If his party is to convince voters that it does indeed have the interests of the country at heart, and that it represents a truly progressive response to unemployment and spending cuts, Bersani needs to take a stand. For the sake of Italy’s future recovery, and for the sake of ordinary Italians, he must abandon the European myth that there are no policy alternatives and seize the initiative, even at the risk of splitting his party.

Alexander Lee is a research fellow at the University of Luxembourg and the University of Warwick and a founding editor of the Utopian.

Image: From the October 15 Rome demonstrations (Barb Mayer, Flick creative commons)