Photographs by Bloomberg; Illustration by Bloomberg View
Photographs by Bloomberg; Illustration by Bloomberg View

Until recently, it was hard to imagine that Silvio Berlusconi, Italy’s scandal-prone former prime minister, might attempt another comeback.

Now, sadly for Italy and Europe, he might. Italy’s prospects are troubled enough without the turmoil that a resurgence of the billionaire media mogul would stir.

Berlusconi, 75, was out of favor when he left office in November, and his career in politics looked over. A busy retirement -- including defending himself on a charge of paying a minor for sex, which he denies -- seemed in prospect. Hopes were high that the emergency administration appointed by Italy’s president and led by Mario Monti, no flamboyant politician but a well-regarded international civil servant, would come to grips with Italy’s financial problems.

Support for the technocrats has already waned, however, and there’s talk of an early election. Brooding about the low standing of his People of Liberty party, Berlusconi is contemplating re-entry. He has said that when Monti’s unelected administration ends its term, Italian politics will return to “normal.” You might say, that’s the problem.

Since taking office, Monti and his team have done well, considering. They bravely raised taxes and cut public spending, bringing fiscal policy under control. Structural reform of labor markets and other backward parts of the Italian economy proved harder, and in those areas a lot is left to do.

In 2011, the World Bank ranked Italy 30th out of 31 advanced economies, ahead of only Greece, for ease of doing business. Evaluated in 10 categories, it scored poorly across the board: 29th in “getting electricity,” 28th in “getting credit,” 27th in “dealing with construction permits,” and dead last in “paying taxes” and “enforcement of contracts.” This sustained accretion of official incompetence hinders new enterprises especially, stifling productivity and innovation, and holding back growth.

A recent report by the International Monetary Fund found much the same. In their evaluation, the IMF economists stressed Italy’s needlessly complex regulation and lack of competition in local public services, which raises business costs. A serious effort to confront the full range of supply-side issues could raise Italy’s output by nearly 6 percent in the medium term, the report says.

Monti has made a start and has done as much as any leader could in such a short time. Yet Italy has already lost patience, and its economic prospects aren’t brightening. Unemployment is high, and the economy is shrinking. Renewed fears over the future of the euro-area countries have driven Spanish 10-year bond yields above 7 percent in recent days, and Italy’s, despite Monti’s efforts, above 6 percent.

In one way, that’s odd. Unlike Spain, Italy has a primary budget surplus (the fiscal balance excluding debt interest), and its banks are healthier. Yet markets remain alarmed.

That’s probably for two reasons: Italy’s stock of debt, at 125 percent of GDP, remains high, and growing political uncertainty calls Monti’s reforms into question. The debt was the legacy of previous governments, including those led by Berlusconi -- and the former prime minister’s talk of a return to politics can only be adding to the risk premium on Italy’s cost of borrowing. You can forgive the technocrats in Rome if they feel frustrated, including by the part Berlusconi is playing in their troubles.

Europe’s austerity caucus, led by German Chancellor Angela Merkel, could help Monti by supporting European Central Bank purchases of Italian government debt, either directly or, if that’s too hard to swallow, indirectly through investors. This would lower the interest rate Italy must pay to finance its debt, and Monti, in turn, would be able to show voters positive results from his budget cutbacks and fend off any seductive, populist attacks by Berlusconi. So far, Germany has opposed aggressive ECB bond buying. The longer it does, however, the more Berlusconi-like heads of state will come to power in Europe, setting back the reforms Germany seeks.

Italy’s prospects will stay clouded until the country and its politicians recognize that Monti’s reforms -- and more of the same -- need to be entrenched and extended. With or without Berlusconi, the last thing Italy needs is to get back to normal.

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