LONDON: Silvio Berlusconi is pushing Italy close the edge, again. The cavaliere's decision to pull his party's ministers from Italy's coalitiongovernment could spook markets, trigger chaotic elections, delay reforms and hurt the country's fragile recovery. The only potential silver lining: it could also trigger the renewal of Italy's politics.
Silvio Berlusconi's decision to withdraw his People of Freedom (PDL) party's five cabinet ministers from the shaky left-right coalition is the second time in a year he has jeopardised a government, after he pulled the rug from under Mario Monti last December. But it could be the 77-year-old's last coup.
Berlusconi's stated reason is that the government failed to avoid an increase in VAT. There's little doubt that this is window dressing for his real motive: an imminent vote to banish him from parliament after a tax fraud conviction and sentence to jail.
The move leaves Prime Minister Enrico Letta of the centre-left Democratic Party (PD) struggling to keep a parliamentary majority by cobbling together his PD with any renegades from Berlusconi's PDL, and comedian Beppe Grillo's Five Star Movement.
Such a government might just be able to pass a budget law and change the flawed electoral system before calling voters to the polls next year. The worst-case scenario would be an early election, under the current system, which can only produce weak governments.
Whatever the outcome, Berlusconi's actions will hurt Italy's nascent economic recovery. The country is barely emerging from its longest post-war recession. Both business and consumer confidence are improving.
Political uncertainty may push up bond spreads, and defer investment and spending. Serious economic reforms are out of the question for now.
And, if early elections followed and looked set to hand power either to Berlusconi or Beppe Grillo, markets will rightly wonder whether the European Central Bank will even contemplate buying the country's bonds at any point.
Still, while some degree of short-term pain is likely, Berlusconi's move will also accelerate the much-needed process of political change.
His patently selfish actions may drive away some voters and split the centre right. And the Democratic Party may hand power more quickly to Matteo Renzi, a liberal and reformist candidate who could appeal to both left and right voters. Investors should both brace for some pain, and take a long view.
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