High Court Holds Up Berlusconi's Tax Fraud Conviction

Many regard Silvio Berlusconi and his antics as an embarrassment for Italy, but we always liked the man's great entertainment value. Moreover, he has always been a thorn in the side of the eurocratic socialistic elites, as he never really got on board with their program. The program we're referring to is of course 'austerity for everyone except the State'.

Unfortunately for Berlusconi, he has left himself open to attack and it was clear that the moment he was no longer Italy's prime minister he would get into trouble with the courts. As long as he held the reins of power, he was able to hide behind laws that were custom-made especially for him and guaranteed him immunity from serious prosecution. As to the concrete cases he is involved in, there are so many that one is tempted to think that in view of so much smoke there must be a fire somewhere. On the other hand, it is also possible that his enemies were simply throwing a lot of cr*p on the wall to see if any of it would stick (not that we think him entirely innocent – very few men reaching such pinnacles of power are).

Anyway, we have not followed these cases in detail and can therefore not provide a well founded opinion on them. However, it is crystal clear that it was primarily his political stance that led to his downfall. The EU's leading lights detested him and held him responsible for worsening the crisis (and cutting their summer vacations short in the process). Indeed, it was Berlusconi's dispute with his economy minister Giulio Tremonti that set off the chain of events that culminated with the installation of the quintessential EU technocrat Mario Monti as Italy's prime minister.  Monti then promptly instituted the EU version of 'austerity', which consisted of 80% of tax hikes, 5% spending cuts and 15% financial repression measures (this is just a rough estimate for illustration purposes).


With the high court upholding Berlusconi's conviction, his political career is likely over, although he has little to worry about otherwise. However, his party rightly fears that losing its popular, if controversial, leader will be to its detriment and is fighting for his political survival. Moreover, the court has refused to order his expulsion from the senate pending a review. According to Bloomberg:


“Silvio Berlusconi’s conviction for tax fraud, upheld late yesterday by Italy’s top court, set up a Senate showdown over his potential expulsion from parliament.

The upper house’s committee for immunities is required to vote on whether to strip Berlusconi, a three-time premier and now a senator, of his seat. The debate, which may take weeks or months, threatens to stoke divisions in the ruling coalition, weakening Prime Minister Enrico Letta’s government.

“I am absolutely aware of the politically delicate moment,” Letta said today at a conference in Rome. “I hope that the collective interests prevail for the good of the country, the good of Italy, and not the partisan interests.”

The fight over Berlusconi’s fate moves to the political arena after the court, which confirmed his guilty verdict, left the sentence for his crime unresolved. Berlusconi was spared the immediate enforcement of a five-year ban on holding public office because the court said it required further judicial review. Berlusconi’s four-year jail sentence, which is temporarily suspended, is unlikely to land him in prison due to leniency guidelines.

“This legal matter could have significant political repercussions given that it is ultimately up to the Senate to vote on whether or not Berlusconi should be ineligible,”Wolfango Piccoli, an analyst with Teneo Intelligence, wrote today in a research report.

The Senate committee is required to consider the case due to a law passed in December under former Prime Minister Mario Monti. It will hold a preliminary vote prior to a final vote in the full Senate, which could be a secret ballot, the head of the committee, Dario Stefano, told Ansa news agency yesterday.

“I think the law must be applied, and from what I understand there is no margin for discretion,” Letta said.

The divide is deepening within the ruling coalition between lawmakers loyal to Berlusconi, 76, and those who, like Letta, have traditionally opposed him. Renato Brunetta, chief whip of Berlusconi’s People of Liberty party in the lower house, said the ruling put democracy in Italy in question, and vowed to rally around the ex-premier. Giuseppe Civati, a lawmaker with Letta’s Democratic Party, said it was time to plan “an exit strategy” from the alliance with Berlusconi.

Yesterday’s ruling was “completely groundless” and “irresponsible,” Berlusconi said in a video message. His party will “stay in the field” and seek a majority from Italians, the former premier said, without giving details.


(emphasis added)

A law introduced under Monti, which Letta thinks leaves no room for discretion? That's quite convenient. In the meantime Berlusconi's party colleagues have come up with a new idea: they are pushing for a pardon of the Cavaliere and are threatening to resign en masse unless they get their way.


“Former Italian Prime Minister Silvio Berlusconi’s party is preparing a push for a pardon of its leader’s tax-fraud conviction and will consider a mass resignation from parliament in protest.

“It was a strong possibility, but it will be in the hands of the chief whips,” Lucio Malan, a senator with Berlusconi’s People of Liberty party, said late yesterday about his colleagues’ discussion of a pardon request in a party meeting in Rome. Of a resignation, he said in an interview, “If we decide together to do it, then I’m ready.”

A group resignation by Berlusconi’s allies, who together represent the second-biggest bloc in the ruling parliamentary coalition, would bring down Prime Minister Enrico Letta’s government. President Giorgio Napolitano, who as head of state holds the power to grant pardons, said Aug. 1 in a statement that the justice system deserves trust and respect.”


(emphasis added)

This doesn't sound like president Napolitano is very eager to overrule the judges by means of a pardon. So the danger of the coalition government falling apart remains at the very least elevated, even though it cannot be said to be imminent (it is not imminent due to the court's decision to leave the expulsion issue to further 'review').

Incidentally, the markets were completely unperturbed; neither government bond yields nor the MIB reacted to the verdict or the threats. We conclude that in spite of the bluster, even Berlusconi's own party is probably beginning to accept that the Cavaliere's career will draw to a close. It's either that, or market participants are underestimating the potential for renewed political upheaval.



10yr. yield ItalyItaly's 10 year government bond yield – no reaction to the Berlusconi verdict – click to enlarge.



MIBThe MIB was likewise unperturbed – click to enlarge.



Preparing for Succession

One reason why the Cavaliere's troubles may no longer be considered a major problem is his age. He's 76 years old, so he's not exactly a spring chicken anymore, although he sure remains quite energetic for his age. As Der Spiegel reports, Berlusconi's plan A is to convince both Letta and Napolitano that letting him off the hook is in their own best interest – since no-one in Italy's political establishment wants early elections (Berlusconi himself on the other hand presumably wouldn't mind elections). He does however also have a plan B, namely to anoint his 47 year old daughter Marina as his successor. Incidentally she is 20 years older than Uncle Silvio's new girlfriend.



“Still, if worse comes to worst, Berlusconi already has a successor lined up — his daughter Marina. In recent days, Marina has been a part of all high-level party meetings, a noticeable change from the past. Indeed, Berlusconi used to be fond of saying that he didn't want his daughter to have to suffer as he has. Now, according to various Italian media outlets, Berlusconi has confided in a select few that his daughter should stand in the upcoming election. Berlusconi-owned "Il Giornale" has also predicted that Marina would perhaps throw her hat into the ring in her father's place.

Marina is Berlusconi's oldest daughter from his first marriage and has always been her father's favorite. Despite having dropped out of university, Marina was installed as the chief executive of her father's media company at the tender age of 30, making her — according to Forbes– the most influential woman in Italy.”


(emphasis added)

While we doubt that Marina will come close to her father in terms of entertainment value, this means there may be some sort of continuity in terms  of the underlying political philosophy (Berlusconi may also try to keep calling the shots from behind the scenes). Regardless of whether various eurocrats detested Berlusconi as a person, their real beef is probably with his political views. After all, Berlusconi is inter alia on record for saying that Italy should rather ditch the euro than becoming an economic protectorate of Brussels that remains mired in an economic downward spiral. He's the only mainstream EU politician heading something more substantial than a protest movement voicing such heretical thoughts.


The Nature of the Problem

The NYT meanwhile correctly notes that Italy has far worse problems than its flawed political leaders, but manages to at least partly misdiagnose the situation. We read there:


On the center-left, the problem is not a flawed leader, but no real leaders, and no real program either. Most of the best-known leaders are former Communists far too eager to prove their capitalist orthodoxy by unquestioning adherence to the ascetic doctrines favored by German bankers.

This has not made them popular with Italian voters. Nor has it helped the Italian economy emerge from what is now a double-dip recession. Unemployment is stuck around 12 percent, and growth has been minuscule for most of the past decade.

With such obvious weaknesses on both sides of the spectrum, the real winner of February’s elections was “none of the above.” The patched-together government that finally emerged in April is an ungainly coalition with few achievements to its credit so far.

What Italy desperately needs is wholesale political renewal producing capable leaders who can rally popular support for overdue structural economic reforms. Should such leaders emerge, their first responsibility would be to lead a credible challenge to the dead-end austerity demands of Italy’s European partners.”


(emphasis added)

The idea that Italy's former communists, now 'social democrats' (wolves in sheep's clothes, basically) want to prove their new-found 'capitalist orthodoxy' by adhering to the 'ascetic doctrines of German bankers' is laughable. Austerity as practiced in euro-land so far has absolutely nothing to do with 'capitalism' or 'capitalist orthodoxy'. Quite to the contrary, the policy has put pressure on the free market by imposing a plethora of new taxes while the size and scope of government continues to grow unabated. The data on spending and debt ratios speak for themselves: the program may be called 'austerity', thereby giving the false impression that it involves genuine cutbacks in government spending, but that is clearly disputed by the facts.

It is true that this particular program needs to be challenged and genuine economic reform needs to be implemented. Unfortunately the NYT fails to use its editorial to spell out what these reforms should consist of, but its focus on the misleading 'austerity' meme indicates to us that it holds that even more government spending is called for (as far as we know, all the prominent economics columnists working for the NYT hold this position). Just to make abundantly clear that Italy's government has not cut spending even by a single euro, here are the data:



EU government spendingItaly's government spending has reached a new record high in euro terms in 2012 – click to enlarge.



To be fair, the NYT editorial does mention 'structural reform', which is indeed what is required. Interestingly, it was an Italian, euro-land's current chief monetary bureaucrat, who has forwarded what has up to this point been one of the best ideas to emanate from EU institutions in this regard: in a recent ECB press conference, Mario Draghi stated that the crisis countries should use the breathing space provided by the calm in financial markets to cut both government spending and taxes, while continuing to implement economic reform. That is precisely what should be done. The biggest  problem in Europe is clearly that the burden of government has grown way too large. Keep in mind that both government spending and taxation burden the economy. The widespread belief that government spending must somehow be a good thing is based on the a number of misconceptions.

First and foremost there is the misguided idea that it is 'spending' that grows the economy. Secondly there is the failure to recognize that every red cent the government spends is one cent less the private sector has at its disposal. Thirdly it is overlooked that spending by the State, even if 'well intentioned', cannot properly account for opportunity costs and thus wastes scarce capital. Lastly, it creates competition for scarce resources with the genuine creators of wealth. Unfortunately there are only very few people in the European political landscape who actually understand these fundamental principles.



Here is a map of Europe as seen through Silvio Berlusconi's eyes:



europe-according-to-silvio-berlusconiEurope according to Berlusconi, by Yanko Tsvetkov





Charts by: BigCharts, Eurostat / Martin Masse



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