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The Old and New "Rome" Threaten Economic Recovery



The neoclassical architecture of Washington, DC is not all that is evoking Rome these days. Regrettably, on the eve of a possible US government shutdown, the political scene in the nation's capital increasingly looks like the fractured and malfunctioning politics of Italy, especially when it comes to right wing extremism.

Both Rome and Washington are succumbing to a revival of the medieval political strategy of hostage taking. Former Prime Minister Silvio Berlusconi is threatening to bring down the Italian government if he is expelled from public office following his conviction for tax fraud, while House Speaker John Boehner's GOP caucus threatens to shut down the US federal government over Obamacare. In medieval Europe, this political strategy was often effective. Sadly, economic circumstances again make it irresistible. With the Italian economy still in recession and the US recovery lagging, these threats could inflict huge economic damage, potentially tipping both countries back into recession. (In the case of Italy, prolonging a recession.) Ruthless political leaders should be expected to pursue a strategy of using their political leverage when it could inflict the most harm.

Both Boehner and Berlusconi see themselves as fighting valiantly against overzealous taxmen, a bogus argument. Berlusconi pretends that his party's ministers have quit the Italian government over a tax policy dispute concerning the long-planned 1 percent increase in the Italian value added tax (VAT). But this increase was enacted in September 2011—when Berlusconi was still prime minister. In reality, Berlusconi is fighting for his political life in the form of a vote in the Italian Senate that might prevent him from holding public office for several years, a potential career ending development for a politician who recently turned 77.

Boehner, meanwhile, fears bypassing his GOP conference and relying on a majority of the House, including Democratic support, which would undermine his leadership of the House GOP. What will happen? In both new and old Rome, the most likely scenarios seem to split the ranks of the reckless. Berlusconi's People of Freedom (PdL) party seems likely to split under the pressure of being blamed for unleashing a new economic crisis. In the end, enough members of parliament will do the right thing for Italy rather than let Rome burn to save Berlusconi. This is certainly the political strategy of President Giorgio Napolitano and Prime Minister Enrico Letta in calling a vote of confidence later this week.

In the United States, one can only hope that like their counterparts in Italy, moderate House GOP members spare the country a crisis that would threaten its majority in 2014. With Goldman Sachs estimating that a one-week shutdown would cost 0.3 percentage point of Q4 growth, the time horizon for politically sustaining a government shutdown is finite.

The joker in the United States is the nuclear option of the debt ceiling coming due by October 17. Here "new Rome" has outdone "old Rome" in brinkmanship. Berlusconi does not have the option to play with the full faith and credit of the Italian government to save his political life. Ultimately, however, the outcome is likely to be the same—a split in the House GOP ranks, as enough Republicans will not want to be responsible for a US government default and enough Berlusconi allies will want to prevent the fall of the government. And if the GOP is myopic, President Obama is likely to simply ignore the debt ceiling and invite a House impeachment procedure.

There is a big difference between the likely fates of Berlusconi and Boehner, however. Here, it is easiest to be optimistic about Italy. Berlusconi was able to take power of the center-right after the demise of the Christian Democratic Party in the early 1990s. But his days are numbered. Remove him personally from Italian politics and prospects for the formation of a sensible center-right party improve.

By contrast, congressional dysfunction in new Rome looks like a more entrenched problem, because it derives from the weakening of the party establishments and the growth of large independent money flowing from single-issue donors to candidates, abetted by the gerrymandering of congressional districts to protect Republicans. The combination means that incumbent GOP members are focused on the political contests that matter—ensuring that they do not face well-funded primary challengers.

Unfortunately, undoing either the unlimited ability of outside donors to pour money into politics or gerrymandering would seem to require a substantial change in Supreme Court decisions, which again would require a change in the composition of the court—which again, looks to be years away. Don't bet on the end of hostage taking in new Rome anytime soon.

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