By Palash R. Ghosh: Subscribe to Palash's RSS feed
August 9, 2010 4:36 PM EDT
With its long history of political chaos, the recent split within the ruling party of Italy's prime minister Silvio Berlusconi is unlikely to derail the nation's attempts to reduce its budget deficit, while the economy seeks to climb out of the recession.
Gianfranco Fini, the speaker of the Parliament and former long-time ally of Berlusconi, recently broke off from his ex-mentor's People of Freedom Party (PDL), and formed a new party called Future and Freedom for Italy (FLI), apparently due to Fini's disenchantment with corruption scandals engulfing several high officials close to the Prime Minister.
As such, it seems unlikely that Berlusconi will be able to finish his term which is scheduled to end in 2013. (He was elected to a third term as prime minister in 2008).
Many Italian observers believe a new election will be held – perhaps as early as next spring, raising the probability that Berlusconi is finished.
Moreover, Fini -- who has gradually moved away from his neo-Fascist roots to adopt a more mainstream center-right philosophy – does not appear to have much support nationally, nor even in the lower house of parliament.
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In addition, the Italian left-wing, which is celebrating Berlusconi's weakened power base, remains fragmented as ever, adding to the overall confusion and uncertainty.
Meanwhile, the Italian economy continues to chug along.
Indeed, last Friday, Italy's national statistical bureau, ISTAT, reported that the country's economy grew for the second consecutive quarter, in spite of the Euro Zone's debt crisis.
Italian GDP edged up 0.4 percent sequentially in the second quarter, matching the first-quarter expansion -- attributed primarily to strengthening export demand (the economy shrank 5.1% in 2009).
For many Euro Zone members, rising exports (in league with a weak Euro) has served as the principal economic growth driver as the continent seeks to crawl away from the devastating recession.
On a year-on-year basis, the Italian economy climbed 1.1 percent in the second quarter, up from a 0.5 percent figure in the first quarter (which represented the first quarter of positive GDP growth since early 2008).
Moreover, industrial production rose in June for the fifth straight month and the Italian jobless rate unexpectedly dropped, after remaining flat for the prior two months.
However, despite a pretty strong second quarter, risks to the economy abound.
For one thing, the Italian Parliament just passed a highly controversial and unpopular 25-billion euro austerity package that is designed to cut the budget deficit to below 3% of GDP by 2012 from 5.3% in 2009; and to engineer a decline in public debt which now totals a whopping 120% of GDP.
Crafted by Economic Minister Giulio Tremonti, the austerity program has already been severely criticized by unions and left-wing politicians. The package calls for, among other measures, big reduction in transfers to regional governments from Rome; a three-year wage freeze for most public employees; a reduction in the hiring of new civil servants; pay cuts for high-earning public sector employees; significant spending reductions across all government ministries; and an increase in the retirement age.
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