Berlusconi's comeback: What could it mean for Italy's future in the eurozone?

In today's City AM, we argue:

The jubilant chanting and cork-popping in Rome last November now looks premature. In a sensational U-turn, Silvio Berlusconi has decided to run for Prime Minister in next year’s elections. 

His comeback may have huge implications for Italy’s future in the single currency. Over the past few weeks, the 75-year-old former Italian Prime Minister has outlined his personal way forward for Italy in the Eurozone crisis – quite revolutionary compared to Italy’s traditional view of its euro membership. 

He has made clear that the solution to the Eurozone crisis is for the European Central Bank (ECB) to become the ultimate backstop for struggling Eurozone countries. If this scenario fails to materialise, there are only two alternatives left. The first, in Berlusconi’s own words, would be Italy and other peripheral euro members saying “ciao ciao” to the single currency. The other would be Germany leaving instead – clearing the way for the ECB to act as the Eurozone’s lender of last resort. Pouring more fuel on the fire, Berlusconi described the prospect of a future outside the single currency as “no blasphemy” and “not the end of the world” for Italy. 

Those remarks were by no means the swan song of a disgraced leader. If there is one thing Berlusconi knows better than many Italian and European politicians, it is how to tell people exactly what they want to hear. And you can bet that he is well aware that riding the anti-euro (and anti-austerity) tiger can pay off in votes these days – as the apparently unstoppable rise in the polls of comedian Beppe Grillo’s Five Star Movement shows. 

Italy leaving the euro remains a distant prospect. Yet, if Berlusconi’s new line of thinking becomes official party policy, the result would be one of the largest political parties in Italy openly saying that the country’s support for the single currency should no longer be unconditional. Add Lega Nord and the Five Star Movement, and the number of anti-euro voices across the political spectrum starts to look worrying. 

The German press has reacted to Berlusconi’s comeback in a particularly telling fashion – with headlines ranging from centre-left Süddeutsche Zeitung’s “The candidacy of a nightmare” to centre-right Die Welt’s “The Godfather, Part IV”. 

Nonetheless, Berlusconi’s return could paradoxically turn out to be good news for Germany. Italy’s centre-left Democratic Party – currently the most popular in opinion polls – could be encouraged to form an anti-Berlusconi coalition with other moderate centre parties. This would break its tradition of seeking allies among the far-left, whose ideological background is incompatible with many of the reforms initiated by Mario Monti’s technocratic cabinet. Despite consistently rejecting the idea so far, Monti might then be willing to stay on as the head of this reformist coalition, provided that it receives broad support in next year’s elections. Unlike with Berlusconi, many Italians would probably forgive him for the U-turn.