Trying to predict Italy’s economic future is not easy when one reads that the latest 10-year bond yield closed at a euro-era high of 7.25 per cent. This comes hot on the heels of Prime Minister Silvio Berlusconi’s proposed resignation. Those who thought Berlusconi’s resignation was the solution to the high debt crisis were disappointed. Investors are exasperated with the two-year debt crisis, which started with the Greek insolvency, followed by Ireland and Portugal.

With the end of the Berlusconi era, investors fear a spillover of the crisis on Italy and the end of la dolce vita. Italians are afraid they could be the next victims of the euro crisis. Compared to other countries in Europe that still have the triple A status, like Germany for example, Italy’s interest rates for new bonds are dangerous high.

“The market’s focus is shifting to Italy,” said Yunosuke Ikeda, an analyst of foreign-exchange research at Nomura Securities Co. High returns and risk premiums are considered a sign of great distrust by investors. Due to these uncertainties, stocks dropped recently and the euro fell against the dollar and yen. The more the yield rises, the more money Italy has to shell out to finance its debt – the start of a debt spiral? The third largest economy in the EU has a huge debt of €1,900 billion– that is about 120 per cent of the gross domestic product (GDP). The strong economy of the post-war period had allowed Italian people some luxuries such as retiring at the age of 50 (Germans retire at 67). Public spending rose astronomically and as a result a political class emerged that consumed about half of the national wealth generated annually. The easygoing Italians expected little interference from their government and are now to be punished for paying expensive house renovations, dental treatments or even a cappuccino ‘under the table’. The penalty for decades of a life of dissipation must be paid and, especially in the current EU crisis, Italy has to pay a great deal. The government’s instability is reflected in a growing unease about contagion that has spread like wild fire across Italy. The Italian economy has not yet recovered from the financial crisis of 2008, which paralysed factories and workers. In addition, continued economic turmoil and restructuring goals undermine consumer confidence.

Prime Minister Silvio Berlusconi has been in the limelight since 1994, charged with alleged financial crimes and sex scandals, but using his seat of power has helped him to survive several criminal procedures. But in the last days the elusive head of government has progressively lost his majority in Parliament. For several weeks there were various rumours on whether Berlusconi intended to resign and pave the way for either new elections or for a transitional government. Financial markets were stunned when Berlusconi was saved in a vote of confidence, which saw most delegates opting to abstain; he was saved by a razor thin majority which belies a fading solidarity with the Cavaliere. However, political majority of the current Italian government with Berlusconi firmly in the driver’s seat has swiftly faded away as only 308 out of the 630 delegates have supported him. According to Italian newspapers, the number of delegates not supporting the prime minister is increasing so much that it would be sufficient to overthrow the government. “I fear we no longer have a majority in Parliament,” Interior Minister Roberto Maroni said in a talk show last Sunday. Maroni, a member of the Northern League party, part of the Prime Minister’s coalition, said he favours early elections. Together with his closest confidants, the Prime Minister had tried to entice the dissenters and defectors back to his side at the weekend. He offered the rebels positions in the government, but also indicated that he would consider them traitors of the fatherland if they abstained or worse still voted against him.

The vote last week, which is normally a formality, was a crucial test to see whether Berlusconi had a majority in Parliament – and its result sealed his political fate. Observers expected that Berlusconi would resign if he lost the vote. Contrary to all expectations, the Italian Prime Minister won the much-anticipated vote on the approval of the 2010 estimates. However, nobody can deny that Berlusconi missed an absolute majority. The left-wing opposition parties and a number of defectors from the camp’s centre-right coalition had previously decided to be present for the vote, but in the end opted to abstain from voting. The opposition’s behaviour clearly indicated that the greatly weakened Berlusconi is sinking deep into a political quagmire, no longer sheltered by a comfortable majority. To obtain an absolute majority, the Italian Prime Minister would have required 316 out of the 630 seats in the Chamber of Deputies at his disposal. That is why the Prime Minister suddenly decided to resign and conceded defeat with President Giorgio Napolitano in a long conversation – but he wants to bide his time when it comes to vacating his powerful seat. First. Berlusconi wants to implement the much-needed fiscal reform laws, which he has promised in Brussels, Cannes and Rome. The timing of his resignation may therefore take place within 12 days to one month. Furthermore, Italy is supposed to implement austerity measures like cost cutting and reform measures that are necessary to avoid a financial disaster. “It’s very urgent” for Italy to pass the austerity plan according to Ferrara, (Berlusconi’s former spokesman and now editor of newspaper Il Foglio). There is a growing fear that Italy will not be able to pay off its enormous debts and therefore exacerbates the fear of the collapse of the eurozone. The expectations of the financial markets are clear: The end of the Berlusconi era! The country is heavily indebted to the financial markets and domestic politics are in a deep crisis of confidence, which is exacerbated by Berlusconi’s several sex scandals and court cases.

Several analysts contend that a remedy for Italy may already be too late because past experiences have shown that self-reinforcing negative market dynamics are very difficult to resolve. According to Austrian Finance Minister Maria Fekter and Finland’s Prime Minister Jyrki Katainen, Italy is too big to be saved by its European partners.

There are concerns that contagion from Greece troubles will spread and because of this global economic growth is slowing. Even the Swiss stock exchange gave a sigh of relief on Italy’s fudged vote of confidence. The Swiss franc slid 1.3 per cent versus the 17-nation euro and 1.5 per cent against the dollar. Policy makers remain ready to act in case the franc’s strength increases the risk of deflation and threatens the country’s economy. Furthermore, Asian stock markets reacted to the uncertainty in Italy, as Japan’s Nikkei 225 Stock Average dropped 1.3 per cent to 8655 points in anticipation of the Italian vote. “There’s just a bad feeling in the market today,” Yutaka Shiraki, a senior strategist at Mitsubishi UFJ Morgan Stanley Securities, summed up on Tuesday.

Back in Europe, we see how German investors flee from crisis states and buy government bonds on a large scale as they are considered to be safe. The creditworthiness of Germany is rated with the top AAA by all major rating agencies due to relatively sound public finances, making a default in payment highly unlikely. As an example, the federal government of Germany recently borrowed around €3.8 billion from investors, and had to pay an interest rate of only 0.08 per cent. In other words, the Federal Republic is able to borrow virtually for free whereas it is mama mia for the Italians who have to pay over seven per cent! The outlook for next Christmas is grim for Italians. At €1.9 trillion, Italy’s debt exceeds that of Greece, Spain, Portugal and Ireland combined, though unlike those nations, it has systemic importance as the world’s third-largest bond market and the eighth biggest economy. Christmas will come late in Rome this year and Santa Claus will need to replenish his bag simply to satisfy the urgent requirements of the dysfunctional Italian economy.

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The writer is a partner in PKF, an audit and business advisory firm