Italian PM forced out as economy goes under

The European debt crisis will soon cost Silvio Berlusconi his job – the second national leader to sink in these choppy financial waters. In such tough times, democracy itself is under threat.

Silvio Berlusconi has survived scandal after scandal in his years as Italy’s prime minister. Allegations of corruption, a string of high-profile affairs, accusations of sex with an underage prostitute, none of these embarrassments could loosen the charismatic billionaire’s hold on power.

But now, to his fury, Berlusconi is being forced to step down. Political allies have abandoned him. His own finance minister is openly hostile. At a crucial vote on emergency financial measures, his government was humiliatingly defeated. He has now announced he will soon resign from his position.

How has one of Europe’s toughest politicians been made to quit? The answer is that Italy is facing an unprecedented financial crisis, as investors become more and more reluctant to lend the country money. The interest Italy’s government has to pay when taking out crucial loans has been steadily rising.

One number that experts are following closely is the yield (i.e. interest) on ten-year loans, or bonds (around 2% for a healthy economy). This week, the figure for Italy, already high, started to climb rapidly.

At 6%, economists started to panic. In the cases of Greece, Ireland and Portugal, they warned, 7% had been the crucial number that forced them to seek emergency financial aid – the dreaded ‘bailouts’. Europe’s most powerful politicians, the leaders of France and Germany, held meetings with top bureaucrats. It was decided that Berlusconi had to go.

Many hoped he would be replaced by a government of technocrats appointed by Italy’s president – experts who would do what is necessary to fix the economy, regardless of protests from the Italian people. But yesterday it looked more likely that there would be a full new election – and political chaos.

For lenders, investors, and the officials who are struggling to save the Euro, this was and is a terrifying prospect. It was no surprise then when Italy’s ten-year bond yields kept on creeping upwards, into the 7% danger zone.

Democracy under threat

The crisis has set the officials who run the EU against the forces of democracy. The members of the so-called Frankfurt Group, representing France, Germany and the EU’s most important institutions, want troubled countries to be run by experts who will do whatever needs to be done. Messing around with elections causes panic among lenders and threatens to tear the EU apart.

But while bureaucrats get on with trying to save the EU, ordinary people in struggling countries are feeling oppressed and unheard. Many now think anonymous lenders and shadowy foreign officials run their country, rather than elected politicians. They feel that their voices are ignored and their rights eroded. They worry that economic security will come at the price of democratic freedom.

You Decide

  1. Is democracy more important than economic stability? And can one survive without the other?
  2. How much power, if any, should be trusted to unelected but expert bureaucrats?

Activities

  1. Compile a debt-crisis glossary, with explanations of some of the key terms. You might want to include: ‘bond’, ‘yield’, ‘sovereign debt’, ‘central bank’, ‘bailout’ and ‘deficit’ – among others.
  2. Ancient Rome was partially democratic – but at moments of crisis citizens would elect adictator(it’s a Latin word), who would rule with absolute power until the danger had passed. Do some research to see how this policy worked for them – you might do a search for Julius Caesar or Lucius Cincinnatus. Would you recommend it to Italians now?

Some People Say...

“At moments of crisis, democracy is a bad form of government.”

What do you think?

Q & A

What happens now?
The Italian economy is in terrible trouble. Share prices (representing the value of Italian companies) are crashing. With debt costs above 7%, it is now not clear that Italy will be able to pay its debts.
Does that mean Italy will have to take emergency bailout cash from other countries?
If only it were that easy! The problem is that unlike Greece or Portugal, Italy is a huge economy. It’s almost too big to save.
So what happens then?
Worst case? Italy goes bankrupt. That would be like a financial explosion at the heart of the world economy. It would plunge us all into a new recession.

Word Watch

Greece, Ireland and Portugal
Among the so-called ‘peripheral economies’ of the EU. All three have been forced to take emergency loans from richer European countries – which come with harsh terms attached.
Bureaucrats
Unelected officials who form the administrative backbone of governments and institutions. The word is from the French bureau, meaning ‘office’ and ‘-crat’, meaning someone who rules.
Technocrat
Another hybrid word, this time from the Greek techne, meaning ‘skill’. A technocrat wields power through his or her technical expertise – in something like economics, for example.
Messing around with elections
The classic example of this was when the Greek prime minister announced recently that he would hold a referendum (a public vote) on emergency financial measures. Panic from lenders, and pressure from European officials, forced his resignation within days of the announcement.

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