Nor will the ousting of Berlusconi be the answer to Italy's troubles. While it seems that the colorful billionaire is at times more interested in promoting his forthcoming album of Italian love songs than solving his nation's fiscal woes, Italy's problems predate his rule. Tough austerity measures will still need to pass if the country is to receive further assistance from the EU bailout fund and the European Central Bank. Berlusconi has already passed some tough measures that have put the country on the right course, but it still falls short of steering the errant battleship back to port.
The real trouble with Italy isn't its leadership – after all, the country has functioned as a going concern despite having more than 60 different governments in the post-war era. Italians are used to constant turnover in their leadership and somehow the country has remained an economic engine for Europe. Its "old world" economy has managed to elevate its citizenry into a lifestyle that no one could have imagined just a few generations ago when millions of desperately poor Italian immigrants left the country in search of a better life in places like the United States and Argentina.
A big reason Italy has been able to live "La Dolce Vita" for as long as it has over the years has been its ability to sell debt – lots of it. Italy is home to the fourth-largest debt market in the world with $1.8 trillion euros outstanding. The nation's shrinking economic power has meant that it has had to borrow more and more money to keep its sweet life going. Italy's debt compared to its GDP currently stands at an alarming 120%, the second-highest in Europe after Greece at 140%.
This high debt to GDP ratio was never really a problem until recently. Like a profligate spending consumer with several low-interest credit cards, Italy just kept requesting larger and larger credit line increases when it needed quick cash. But when the era of easy money ended with the credit crunch, things started to get pretty hairy. Italy was a highly-rated sovereign so it was still able to attract capital to its liquid debt markets; it just had to offer investors a higher yield.
This is the root of Italy's current problems. Since June, large pension funds and buy-side shops have shunned Italian debt, forcing Italy to offer even higher interest on its debt. This was a problem for an economic model that was predicated on the belief the country could borrow and roll over its debt at low interest rates ad infinitum. If it had to pay high interest, it would eventually go broke.
Central bankers to the rescue
