Letta's urgent task is to fix the banks, and this will test his ability to tackle vested interests, writes Münchau in his FT column.
The most urgent task is to fix the banks. Without credit growth, there can be no sustainable recovery. The over-indebted and under-capitalised banks have loaded up on Italian government bonds instead of lending to the private sector. Yet fixing the banks is unpopular because the political parties have corporate control over them. Banking will be the test of Mr Letta’s ability and willingness to take on vested interests, especially inside his own party.
Unfortunately, he also decided to follow the European fiscal rules to the letter, instead of seeking a grand bargain with Brussels on economic reforms which he could have traded in against some fiscal breathing space. Italy is on course to overshoot its 2013 deficit target of 3 per cent of GDP due to a larger-than-projected recession. In a low-growth scenario, the country will have to run permanent and large primary fiscal surpluses to bring down the level of debt. That would be economically painful and politically suicidal.
Mr Letta and Mr Alfano have scored an important tactical victory over Mr Berlusconi and his acolytes, but this is not going to be the last battle in the fight against right-wing populism. I would not even completely count out Mr Berlusconi himself, though he will at most play a more detached political role.
One possible, though far from certain scenario, is for the PdL to break up into a populist wing, led by the Berlusconi clan, and a moderate centre-right rump. It is not clear whether the latter would be electorally viable. Why would Italians reward centrist politicians who have thrown the country deeper into recession, when they did not do so at the last elections? Just look at what happened to Mario Monti, Mr Letta’s predecessor. Mr Berlusconi came very close to winning the February elections because he managed to run as an anti-establishment outsider.
Unless the forces in the political centre fix Italy’s problems – something they have manifestly failed to do – the populist right will enjoy a resurgence. Last week’s political victory would then go down as the centrists’ last hurrah.
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