Bloomberg News

Berlusconi Resigns as Monti Prepares New Italian Government

November 13, 2011

(Updates with Monti policies starting in 12th paragraph. For more on the region’s debt crisis, see EXT4.)

Nov. 13 (Bloomberg) -- Prime Minister Silvio Berlusconi, who dominated Italian politics for almost two decades, stepped down as the fallout from his legal woes and contagion from the euro-region’s debt crisis led his government to unravel.

Berlusconi presented his resignation last night to President Giorgio Napolitano after the Parliament in Rome approved measures to spur growth and reduce the euro-area’s second-biggest debt. Napolitano will ask former European Union Competition Commissioner Mario Monti to form a government this evening after talks with political parties that began at 9 a.m.

Thousands of Italians gathered outside the presidential palace to witness the final minutes of the country’s longest- serving prime minister since the Second World War. Berlusconi won three elections and governed for more than half the 17 years he was in politics. Many yelled “buffoon” as he drove by. Celebrations broke out with people waving flags, drinking prosecco and dancing, producing an atmosphere more reminiscent of Italy’s 2006 World Cup victory than a political event.

“We cannot imagine that without Berlusconi our problems are solved, but without Berlusconi we can start working on how to solve the problem,” Rocco Buttiglione, a member of the Union of Centrists and a member of Berlusconi’s previous government, said yesterday in Rome.

Yields Surge

Berlusconi, 75, said on Nov. 8 that he would resign as soon as the budget measures were passed. Defections had left him without a majority in parliament, and Italy’s 10-year bond yield had surged past the 7 percent threshold that led Greece, Ireland and Portugal to seek EU bailouts. Squabbling among his Cabinet paralyzed the government, and his defense of charges that include bribery and paying for sex with a minor sapped his popularity at home and undercut his support abroad.

Since Berlusconi’s first election, “not very much has changed,” said Grant Amyot, professor of politics at Queen’s University in Ontario, Canada, and co-author of “The End of the Berlusconi Era?”

“All the world has become more competitive,” Amyot said. “Italy’s economic and state structures needed to be reformed, and it hasn’t been done. That’s the real problem: Stagnation is the word I would use to describe the impact of Berlusconi’s rule.”

Markets React

The yield on Italy’s benchmark 10-year bond jumped to a euro-era record 7.48 percent on Nov. 9, hours after Berlusconi first said he would resign. Italy was forced to pay 6.087 percent on one-year bills at an auction on Nov. 10, the most in more than 14 years. News of the growing support for a Monti government helped knock more than 100 basis points off that peak and sent Italy’s benchmark SPMIB Index up 3.7 percent on Nov. 11, the biggest advance of any European benchmark.

In his third term, Berlusconi was increasingly distracted by his four personal court cases while his government faced pressure from European allies to accelerate debt reduction as Italy’s bonds slumped, leading the European Central Bank to start buying the country’s debt in August.

Berlusconi’s fall comes two days after Greek Prime Minister George Papandreou resigned to make way for a coalition government with broader support to implement cost-cuts that will shrink the biggest deficit in the euro region. Changes of governments in Italy and Greece were “positive,” U.S. President Barack Obama said in Honolulu yesterday.

Party Backs Monti

Monti, 68, must still win confidence votes in both houses of parliament. Berlusconi’s People of Liberty party said in a statement yesterday that it will back Monti, diffusing calls from some Berlusconi allies to try to block his confirmation in the Senate, where the outgoing premier still has a majority.

Monti would lead a so-called technical government of mostly non-politicians charged with implementing the austerity measures passed by Berlusconi. They will try to persuade investors that Italy can trim its debt of 1.9 trillion euros ($2.6 trillion), more than that of Greece, Spain, Portugal and Ireland combined.

His economic policy will initially focus on cutting debt, before seeking to revive expansion in an economy where growth has lagged behind the euro-region average for more than a decade, la Repubblica reported today, without saying where it got the information.

Tax Policy

Monti is considering resurrecting a property tax on first homes that was abolished by Berlusconi, introducing a wealth tax and speeding up asset sales, the newspaper said. He will follow with an overhaul of labor-market laws that could make it easier for companies to fire workers, and offer incentives for taking on young workers in a country where youth unemployment is almost 30 percent, according to the report.

Monti plans to name Guido Tabellini as finance minister, Corriere della Sera reported yesterday, without saying where it got the information. Tabellini, 55, is a professor of economics at Bocconi University in Milan, where Monti is president. Giuliano Amato, a former prime minister and now an adviser to Deutsche Bank AG, will be foreign minister, Corriere said.

To win the ECB bond purchases, Berlusconi pledged to ease rigid hiring rules, raise the retirement age, open up closed professions and balance the budget in 2013. Monti’s government won’t have much time because he can’t serve beyond April 2013, when Berlusconi’s term was due to expire.

Lagarde, Draghi

Monti has the support of much of the opposition to Berlusconi, and Napolitano’s decision to push for a Monti government has already been praised by leaders outside Italy. International Monetary Fund Managing Director Christine Lagarde, speaking in Tokyo yesterday, called Monti “extremely competent.” ECB President Mario Draghi met with Monti this morning in Rome.

Monti spent almost a decade in Brussels as EU commissioner, first for the internal market and then for competition. In 2001, he blocked General Electric Co.’s takeover of Honeywell International Inc., the first time the EU had stopped a deal previously approved by U.S. authorities. He also levied a record 497 million-euro fine against Microsoft Corp. He’s been an international adviser to Goldman Sachs Group Inc. for six years.

--With assistance from David Tweed, Flavia Rotondi, Alessandra Migliaccio and Lorenzo Totaro in Rome. Editors: Andrew Davis, Amanda Jordan

To contact the reporter on this story: Andrew Davis in Rome at abdavis@bloomberg.net

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net


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