Italy between the EU and Berlusconi: Effects of external and internal factors on the Italian Public Debt : Effects of external and internal factors on the Italian Public Debt [1 ed.] 9783954896240, 9783954891245

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Alberto Mittestainer

Italy between the EU and Berlusconi

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Effects of external and internal factors on the Italian Public Debt

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Mittestainer, Alberto. Italy between the EU and Berlusconi: Effects of external and internal factors on the Italian Public Debt : Effects of external and internal factors on the Italian

Mittestainer, Alberto: Italy between the EU and Berlusconi: Effects of external and internal factors on the Italian Public Debt. Hamburg, Anchor Academic Publishing 2014 Original title of the thesis: Italian Public Debt: Role of Domestic Political Factors and External Pressure Buch-ISBN: 978-3-95489-124-5 PDF-eBook-ISBN: 978-3-95489-624-0 Druck/Herstellung: Anchor Academic Publishing, Hamburg, 2014 Additionally: London, School of Economics, England, 2012.

Bibliografische Information der Deutschen Nationalbibliothek: Die Deutsche Nationalbibliothek verzeichnet diese Publikation in der Deutschen Nationalbibliografie; detaillierte bibliografische Daten sind im Internet über http://dnb.d-nb.de abrufbar Bibliographical Information of the German National Library: The German National Library lists this publication in the German National Bibliography. Detailed bibliographic data can be found at: http://dnb.d-nb.de

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Mittestainer, Alberto. Italy between the EU and Berlusconi: Effects of external and internal factors on the Italian Public Debt : Effects of external and internal factors on the Italian

Table of Contents CHAPTER 1: INTRODUCTION......................................................................... 7 CHAPTER 2: DOMESTIC LEVEL AND EXTERNAL CONSTRAIN: THEORIES........................................................................................................... 10 2.1 OPPORTUNISTIC POLITICAL BUSINESS CYCLE ............................................... 11 2.2 PARTISAN POLITICAL BUSINESS CYCLE ........................................................ 12 2.3 THEORY ON FRAGMENTATION, GOVERNMENT INSTABILITY AND POLARIZATION .................................................................................................... 12 2.4 ALTERNATIVE EXPLANATION: EXTERNAL PRESSURE ..................................... 16 CHAPTER 3: ITALIAN PUBLIC DEBT VARIATION: 1994-2008 ............. 19 CHAPTER 4: EXPLAINING PUBLIC DEBT VARIATION ......................... 24 4.1 OPPORTUNIST AND PARTISAN MODELS .......................................................... 24 4.2 POLITICAL INSTITUTIONS MODELS ................................................................. 25 4.3 EXTERNAL CONSTRAINT ............................................................................... 31 CHAPTER 5: QUALITATIVE RESEARCH ................................................... 34 5.1 METHODOLOGY............................................................................................. 34 5.2 FINDINGS ....................................................................................................... 36

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5.2.1 First period (1994-2001) ....................................................................... 37 5.2.2 Second Period (2002-2007) ................................................................... 43 CHAPTER 6: CONCLUSION ........................................................................... 48 BIBLIOGRAPHY ................................................................................................ 51

Mittestainer, Alberto. Italy between the EU and Berlusconi: Effects of external and internal factors on the Italian Public Debt : Effects of external and internal factors on the Italian

Copyright © 2013. Diplomica Verlag. All rights reserved. Mittestainer, Alberto. Italy between the EU and Berlusconi: Effects of external and internal factors on the Italian Public Debt : Effects of external and internal factors on the Italian

Chapter 1: Introduction The goal of this paper is to investigate whether the reduction of the Italian public debt between 1994 and 2004 and the increase after 2004 is due to internal or external factors. Given the current debt crisis in Europe, this is a fundamental question since it may demonstrate if Italy, and states in general, are able to handle their fiscal problem by themselves or they need external help.

In this study, high public debt is considered to have mainly negative effects on the economic performance of the country (as suggested by Dornbusch et al., 1998, p.478; Moon 2010 p. 36; Spaventa, 1988, 16; Chowdhruy, 2010), although it may produce some benefits (Moon, 2010, 34). Thus, it must be reduced with different policies that governments can choose (Krugman 2012, Corsetti 2012). Italy, in particular, has a long history of extremely high public debt (Technical Commission for Public Finance, 2007, 1), however, from 1994 to 2008 there is an evident variation, in particular between 1994 and 2004 the debt decreased due to the reduction of primary expenditures.

The International Political Economy literature suggested three main possible theories to explain the variation of public debt regarding internal factors. First, the

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opportunistic political busyness cycle explains the variation by arguing that politicians manipulate the economy in order to be re-elected (Nordhaus, 1975; Tufte 1978; Alesina, 1988; Rogoff-Sibert 1988). Second, the partisan business political cycle explains variation due to difference goals among parties, with leftist parties tending to adopt more expansionary policies (Hibbs, 1977; MulasGranados, 2003; Fowler, 2006). Finally, the last and most viable theory looks at

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level of fragmentation, polarization and government instability to explain variation. Increasing levels of these variables tend to produce expansionary policies (Alt, Lassen, 2005; Grilli et al., 1991; Roubini et al, 1989; Alesina and Perotti, 1996; Person, Tabellini, 2004).

The alternative to these three internally focused theories is to consider external factors that may have influenced Italian decision makers in reducing the debt between 1994 and 2004 (Whitehead, 2006). The Maastricht Treaty and the European Union may have played this role since Italy has to reduce its debt in order to be able to join it (Efthyvoulou, 2011; Oatley, 1999).

The evidence, in the form of a detailed analysis of parliamentary debates and newspaper articles, will show that Italy was able to reduce the public debt only when pressured from outside and that the external constraints of the European Union, in the form of Maastricht Parameters, greatly impacted the level of Italian debt. Once Italy complied with them and became a member of the European Union, the effect disappeared and the Italian public debt started increasing again. Internal factors do not appear to have played a role. In particular, the qualitative study of parliamentary debates on the budget shows that the level of polarization and the role of veto players caused by it have remained constant and therefore

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can’t be used to explain the variation in public debt.

The study is divided as follow. Chapter Two will outline in more detail the three theories relying on internal factors to explain debt variation and the external constraints explanation. Chapter Three will describe the variation of the public

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Mittestainer, Alberto. Italy between the EU and Berlusconi: Effects of external and internal factors on the Italian Public Debt : Effects of external and internal factors on the Italian

debt. Chapter Four will use macro data to verify whether fragmentation and government instability may provide an explanation. Chapter Five will describe the methodology and the qualitative analysis performed in order to verify whether polarization and the role of veto players or the external constraints played a role in

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the reduction and then increase of the Italian public debt.

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Chapter 2: Domestic level and external constrain: theories There is a vast literature that tries to explain why countries have huge public debt while others are able to balance their budgets. Economic theories, however, are not sufficient to explain why some states run bigger deficit than others (Technical Commission for Public Finance, 2007, 18; Alesina, Perrotti, 1995).

Therefore, theories that consider both economic and political factors of why states run deficit are particularly useful. Three main theories are discussed and explained: opportunistic political business cycle, partisan political business cycle and that relying on variables such as fragmentation and polarization. It will be observed, however, that the first two theories do not apply to the case observed. Given the long period of reduction of the debt, the two theories can’t be applied since there is no reason why politicians did not adopt opportunistic behaviour during those years and both leftists and rightist governments were involved in the reduction of the debt. Therefore there will be only a short review of them.

Yet, to the list of possible theories that can help explain why countries may have bigger public debt, those ones that account for the role of external factors must

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also be taken into consideration. In particular, the European Union may have played a role in shaping Italy and other European countries’ policies.

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Mittestainer, Alberto. Italy between the EU and Berlusconi: Effects of external and internal factors on the Italian Public Debt : Effects of external and internal factors on the Italian

2.1 Opportunistic Political Business Cycle A possible explanation of why states run big deficits relies on the opportunistic behaviour of politicians. The model of opportunism political business cycle argues that a politician will increase expenditures before the election in order to gain support from voters (Nordhaus, 1975; Tufte, 1978).

This first wave of literature of opportunistic behaviour did not receive much support until later research. Scholars found mixed empirical support and were critical of the fact that voters were considered irrational (Alesina and Roubini, 1992, 3; Drazen, 2000, 96; Franzese, 2002, 380-381). As a consequence, a second wave of research elaborated on the opportunistic political business cycle (Alesina, 1988, 16). The aim of the scholars was to create a model where the voters are rational but can still fail to choose the best politicians due to other reasons such as, for example, lack of perfect information (see for example Rogoff-Sibert 1988, Cuckierman-Meltzer 1986).

Despite this new approach, these models still lack a unanimous empirical support in large cross-countries studies, although may perform well in one country case studies (Clarks et al., 2012, 88). Therefore, some scholars tried to introduce other variables (Schultz, 1995, 80-81; Clarks et al., 2012, 88) or applied the models to

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developing countries only where they are supported by the data (Block, Vaaler, 2004, 941; Shi, Svensson, 2006, 1368; Brender and Drazen, 2005, 1292).

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2.2 Partisan Political Business Cycle This theory argues that political parties have different goals and different priorities that they pursue while in office (Drazen, 2000, 88). Hibbs (1977, 1977) argues that left-wing parties have as priorities full employment and equalization of income distribution while right wing parties pursue price stability and, at a lower extent, balance of payments equilibrium. Therefore, leftist parties should produce larger debt than rightists. Similarly to the opportunist model, scholars have introduced rational expectations (Alesina, 1988).

Scholars have tested these models and have found that the partisan effects are not strong (Mink and de Haan, 2006; Alesina, Roubini, Cohen, 1999) or absent (Heckelman, 2006; Faust and Irons, 1999). In order to explain why sometimes there can be no partisan effects, scholars claimed that it may be because the party is sure to win (Fowler, 2006, 100), or because political parties may have changed policy preferences (Mulas-Granados, 2003, 36) or because there are other important factors that prevail such as the number of veto players (Perotti and Kontopoulos, 2002, 193-194).

2.3 Theory on Fragmentation, Government instability and Polarization

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Another strand of the literature focuses on the attributes of the democratic political institutions and how they affect the level of public debt. These attributes can be fragmentation, government instability and polarization (Grilli et al., 1991, 349). These factors produce coordination problems and common pool dilemma problems within the government such as spending ministers (Hallerberg, unpublished, 3), political parties and other decisions makers such as decentralized 12

Mittestainer, Alberto. Italy between the EU and Berlusconi: Effects of external and internal factors on the Italian Public Debt : Effects of external and internal factors on the Italian

units, and veto players (Alt, Lassen, 2005, 1405) that increase the chances that a government runs a bigger debt. Coordination problems refers to the increasing the number of actors involved in the decision making process which makes it, therefore, harder to get to an agreement. Common pool dilemma refers to the increasing number of actors with different goals and objectives. Thus, there are more chances for the approval of decisions that do not favour the whole community (ibid.).

In more detail, greater instability affects governments in terms of shortening the time horizon. Governments have, therefore, incentives to pursue the policy they want, disregarding future consequences (Grilli et al., 1991, 349). Polarization means the level of disagreement among policy makers. If it harder to get to a decision, there are more possibilities that a government is unable to adopt policies to reduce the debt (Eslava, 2011, 648). Fragmentation measures how many different actors are involved in the decision process. Different actors have different interests; they may try to adopt policies that favour their constituencies but share the costs on the whole country (Roubini et al, 1989, 126; Alesina and Perotti, 1996, 16). The first two conditions stress political instability as a key to explain variation of the public debt. Fragmentation, instead, regards government

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weakness (Grilli et al., 1991, 11).

Following these consideration, other scholars have suggested that politicians should have less decision power on economic issues in favour of independent institutions, such as central banks (Fatas, Mihov, 2002, 27). Among the three,

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fragmentation has been widely tested (Eslava, 2011, 657) and data seem to confirm that higher level of fragmentation produce higher level of deficit.

Electoral systems and types of regime directly affect instability, polarization and fragmentation (ibid.) Electoral systems determine the size of the support of the ruling party in the parliament, how many parties there are in the ruling government and how long the government is going to last. All these outcomes influence the ability of the government to keep the debt under control.

Electoral laws are classified in two broad categories: majoritarian and proportional (Person, Tabellini, 2004, 78-79). A majoritarian system is considered to be the best option in terms of reducing the chances that the elected politicians will increase the debt. Indeed, majoritarian system tends to produce strong and cohesive government, with only few or one party in the government (Fabrizio, Mody, 2006, 696). As a consequence, fragmentation and polarization are low. The best example is the electoral law of UK, where usually only two parties alternate. Proportional systems, instead, favour coalition governments and increase the number of players with diverging interests (Person, Tabellini, 2004, 78-79). These systems are associated with higher level of public debt since fragmentation is higher due to the fact that coalition governments composed of many parties.

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Polarization is also higher because the candidates are elected by different constituencies (ibid.).

Regime types are also important since they determine whether a government is parliamentary or presidential. The number of veto players in these two forms are

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Mittestainer, Alberto. Italy between the EU and Berlusconi: Effects of external and internal factors on the Italian Public Debt : Effects of external and internal factors on the Italian

different and, as a consequence, are also different in the size of expenditures (Grilli et al, 1991, 375; Person, Tabellini, 2004, 84-85). Different regimes may create incentives or favour policies that increase the public debt. The two main regime types are presidential and parliamentary (Person, Tabellini, 2004, 84-85). The presidential system is usually considered to favour austere policies by decision makers. The president represents the interests of the whole country and not special interests and he/she faces a limited number of veto players. Polarization and fragmentation are really low or absent. Also political instability tends to be really low, since the president is entitled to the executive power alone, and the end of his term usually follows the natural length of his presidency (ibid.).

On the other hand, parliamentary systems are often considered to favour higher deficit. The decision process is shared among the prime minister and the other ministers, and on top of that there is a direct link with the parliament. As a result, the number of veto players is higher and political instability is bigger since these veto players may be able to throw the government out of office (ibid.). Data shows that parliamentary and proportional systems are indeed characterized by higher level of public debt than countries with an elected president and majoritarian systems (Eslava, 2011, 657-658)

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Scholars have tested these hypotheses in both developed and developing countries. In general, it has been confirmed that higher level of cohesion in the government reduces the chances of having a higher budget deficit. Cohesion is a general formula that encompasses both level of polarization and fragmentation. In more detail, fragmentation has been tested and there are clear results showing the

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negative impact on national budgets, while for polarization there are not as many studies (ibid.).

2.4 Alternative explanation: external pressure Beside the three possible explanations considered, it is also worthwhile to look at factors outside the country. Countries are, in fact, players in the international system which is able to influence the domestic system. In the case of economic policies, it is possible to refer to a general external constraint that reduces the room to manoeuvre for policy-makers. In the context of this paper, an external constraint may be useful to explain why a particular government decided to adopt policies that reduce or at least tried to tackle high deficit (Tius, 2007; Efthyvoulou, 2011).

According to Tius (2007, 5), many scholars have relied on the theory of diffusion to explain how a subject or system can influence another one. The core idea is that an epicentre is the source of ideas that spreads policies to the other subjects of the system. However, in order to explain how the international system affects the domestic system, it is better to rely more on specific tools that can actually explain the link between the international system and the domestic system. For example, Whitehead (2006) identifies three ways the international system can

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influence domestic system: contagion, control and consent. According to Tius (2007, 5), the first two are particularly relevant because they almost only apply to the international system and how it influences the domestic level.

Another example it is provided by Wade (2006, 627-633) who studied developing countries and identified three ways in which the international system can influ16

Mittestainer, Alberto. Italy between the EU and Berlusconi: Effects of external and internal factors on the Italian Public Debt : Effects of external and internal factors on the Italian

ence the domestic realm: inspiration or when foreign ideas are internalized by the domestic system, subsidy which is when the domestic system is influenced though the provision of benefits and substitution which occurs when there is direct imposition of decisions and policy in the domestic realm.

In this paper, the European Union and in more detail the Maastricht Treaty, are the international factors that may help explain the policies adopted in the domestic level. Indeed, they may have played a role in influencing and changing the behaviour of domestic actors in Italy. Scholars have studied the role of the agreements among European countries in shaping domestic policies and some papers also analysed the impact of the EU among non-members (Brusis, 2002; Schimmelfennig, 2005).

Studies seemed to confirm that the European Union plays a role of constraining countries. For example, Efthyvoulou (2011, 640) found that in Cyprus, globalization and the European Monetary Union (EMU) have played a big role in reducing the difference among parties. Efthyvoulou argued that, although Cyprus has a political system that favours a strong political competition, with marked ideological differences among parties, being member of the European Union and before of the EMU have had a strong impact on the political life, greatly reducing the

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difference among parties. In other words, according to the scholar, the external constraint has made all politicians behave in the same way (Efthyvoulou, 2011, 639).

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Other authors claim that some international factors do not play a role in reducing domestic autonomy on policies while others do. The European Union belongs to the latter category. For example, Oatley (1999, 1022) argues that capital mobility has not reduced political independence among countries. On the other hand, the Maastricht treaty has played an important role in decreasing the level of differences among the parties and in promoting certain policies.

In conclusion, the European Union and the Maastricht Treaty are possible factors that have influenced Italian politics, as they did in other countries. The influence, however, varies among countries due to the difference in size, economic system and exposure to the international market. Therefore, the impact of the European Union and the Maastricht Treaty could have been negligible. The goal of this

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paper is to verify whether it played a role.

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Mittestainer, Alberto. Italy between the EU and Berlusconi: Effects of external and internal factors on the Italian Public Debt : Effects of external and internal factors on the Italian

Chapter 3: Italian Public debt variation: 1994-2008 Between 1994 and 2008, the public debt/GDP of Italy ratio shows an interesting pattern: it stabilized and then decreased between 1994 and 2004 and then returned to growth after 2004. Before testing the theories described in the previous sections, a detailed analysis of the debt variation of Italy in those years will be provided.

The Italian debt is currently one of the biggest in Europe and is one of reasons behind the nomination of a technocratic government in December 2011. The Prime Minister has adopted decisions, often opposed by the population, that tried to reduce the outstanding debt. Italy, however, has had a large public debt throughout almost its entire life as republic. After the Second World War, the Italian debt started increasing because successive governments began providing services such as health care and education to the whole population (Technical Commission for Public Finance, 2007, 1). Also in other countries, the debt started increasing due to this new role of the state (ibid.).

Other European countries, after this initial increase in public debt, managed to

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keep the deficit under control year after year. Italy, instead, saw his public debt greatly increase during the 1980s due to expenditure in health, education and other services (ibid.). Only between 1994 and 2004 was Italy able to reduce the debt/GDP ratio. Additionally, as seen in the table, there was a reduction in the debt/GDP ratio also between 2006 and 2008. However, it was due only to a

Mittestainer, Alberto. Italy between the EU and Berlusconi: Effects of external and internal factors on the Italian Public Debt : Effects of external and internal factors on the Italian

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reduction in the interest rate that Italy had to pay (Technical Commission for Public Finance, 2007, 11-12).

125,0 120,0 Debt/GDP (%)

115,0 110,0 105,0 100,0

90,0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

95,0

Years

Figure 1. Source: ISTAT (see bibliography)

The public debt decreased because changes in public expenditures. By 1998, the public expenditure decreased of 7.6% of the GDP (ibid.). 5% was due to the reduction on the cost paid on interest. Italy was able to pay less on interest due to political decisions that increased the confidence of the external market regarding the country. However, more importantly, it was the role of the Italian Central

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Bank which was, in fact, able to reduce inflation and to become a trusted opponent of future inflation outbursts (Signorini, Visco, 2002, 90). Since the Central Bank was behind this reduction and not political factors, the reduction of the debt/GDP ratio of 5% is not taken into consideration.

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Mittestainer, Alberto. Italy between the EU and Berlusconi: Effects of external and internal factors on the Italian Public Debt : Effects of external and internal factors on the Italian

This paper looks instead at the reduction of 2% (Technical Commission for Public Finance, 2007, 12). The reduction resulted from political decisions amounted to 21 182 million Euros (ISTAT, see bibliography). It is clearly possible to note how public expenditure in different sectors has decreased. Figure 2 shows variation in the expenditure divided by GDP for defence. There is a clear reduction starting

1,7 1,6 1,5 1,4 1,3 1,2 1,1 1,0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Expenditures in Defence (millions of Euro)

around 1992 and lasting until 2004.

Years

Figure 2. Source: ISTAT (see bibliography)

Figure 3 shows the public expenditures for health care. It is possible to note that

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only after 2004 did the ratio match one reached in 1991.

Mittestainer, Alberto. Italy between the EU and Berlusconi: Effects of external and internal factors on the Italian Public Debt : Effects of external and internal factors on the Italian

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7,0 6,5 6,0 5,5 5,0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Expenditures in Health Care (Millions of Euro)

7,5

Years

Figure3. Source: ISTAT (see bibliography)

Finally, in Figure 4 is the ratio for service expenditures such as transfer for the unemployed or those with low wages. Between 1992 and 1995, the ratio increased

19,0 18,5 18,0 17,5 17,0 16,5

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

15,5

1991

16,0 1990

Expenditure in Services to Citizens (Millions of Euro)

sharply. It then decreases or remains constant until 2003.

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Years

Figure 4 Source: ISTAT (see bibliography)

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Mittestainer, Alberto. Italy between the EU and Berlusconi: Effects of external and internal factors on the Italian Public Debt : Effects of external and internal factors on the Italian

These three charts show a clear pattern: around 1994 and until 2004, the level of expenditure in different sectors has decreased in relation to GDP. This reduction is the effect of decisions taken by the government and the parliament. It should be possible to explain this pattern of the public expenditure by applying the theories outlined in the previous sections and, in particular, looking at fragmentation and government instability. It will be demonstrated, however, that using only macro

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indicators is not possible to provide any explanation.

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Chapter 4: Explaining public debt variation The goal of this section is to apply the theories outlined in the previous section in order to explain the variation of public debt level from 1994 to 2007. It will be shown the opportunistic and partisan theories do not apply to the case considered. Also, controlling for fragmentation and instability has poor explanatory power. Indeed, according to the three theories previously outlined, the pattern of the data should be different in order to explain the variation of the level of public debt in Italy. The alternative is to rely on level of polarization and the external constraints in order to explain the variation.

4.1 Opportunist and partisan models In order to explain debt variation, the opportunistic and partisan models do not seem to have any explanatory power. Opportunistic behaviour models argue that politicians should manipulate the economy before elections in order to increase the chance to be re-elected. In the case analysed, however, the periods when the expenditures increased are not before an election. On the contrary, between 1994 and 2004, all governments pursued policies that tried to reduce expenditures. Even transfers, in those years, decreased. After 2004, the pattern is the opposite; the public debt started increasing again and governments raised the resources used

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to pay services and transfer infrastructures.

Some scholars argued that politicians are not going to manipulate the economy in case they are sure to win (Schultz, 1995, 80-81). Even considering this option, the model of opportunistic behaviour does not hold. Between 1994 and 2004, no

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Mittestainer, Alberto. Italy between the EU and Berlusconi: Effects of external and internal factors on the Italian Public Debt : Effects of external and internal factors on the Italian

political parties managed to stay in power. Berlusconi’s party won the elections in 2004, then Ulivo in 1996 and finally in 2001 won again Berlusconi.

Also the partisan models are not able to provide an explanation to the variation of public debt in Italy. According to these models, leftist parties should adopt expansionary fiscal and monetary policies (Hibbs, 1977, 1470-1471) while rightist parties should pursue policies that promote low inflation and balanced budget which clearly did not occur in Italy. Between 1994 and 2004 and 2004 and 2007 parties from both side of the political spectrum were in power. In other words, during the first ten years, centre-right parties and centre-left parties pursued similar policies. In the second period, after 2004, the same happened. Parties follow similar expansionary policies.

4.2 Political Institutions models The last possibility is to rely on political institutions in order to explain the variation of public debt. In order to test these models, it is possible to use macro data available on Italy for each year considered by the Database on Political Institutions (2010). However, in this case as well, the macro data does not comply with the expectations of the models. Before disregarding the models, however, it is possible to proceed with a qualitative analysis of polarization using parliamen-

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tary debates and newspapers.

Macro data result from the aggregation of information at unit level (Diez-Roux, 2002, 588). For example, data regarding the rate of unemployment in a city is the sum of the job status of each inhabitant of the city. This type of data has a few advantages. First, it is easy to collect. In order to understand if a coalition is

Mittestainer, Alberto. Italy between the EU and Berlusconi: Effects of external and internal factors on the Italian Public Debt : Effects of external and internal factors on the Italian

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polarized, it is simply required to read the manifesto of the party or ask the president where he locates his party in the political spectrum. Once this information is collected, it is possible to measure how politically far the two parties are to the extremes of the political spectrum. In addition, this data is also easy to interpret. For example, usually there are only three alternatives to party orientation, right, left and centre. Finally, it provides a clear and concise overview of the political situation in each year. To understand whether there is a high level of fragmentation, it is possible to count the number of the parties in the coalition, and the higher the number is, the higher the fragmentation is.

It will be shown that this data is not able to explain why the public debt has decreased in certain years and why it has increased in others. A possible explanation is that some of these data sets are not trustable indicators. For example, polarization is defined as the distance between the two most different parties in a coalition. Yet, the fact that one party is leftists and the other party rightist does not imply that these two parties will not collaborate. As a consequence, it is worthwhile to adopt other strategies to explain why the Italian public debt varied in the years considered.

Looking at the data from the Database, it is possible to observe how the duration

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of governments has increased over the years.

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Mittestainer, Alberto. Italy between the EU and Berlusconi: Effects of external and internal factors on the Italian Public Debt : Effects of external and internal factors on the Italian

9 8 Years in Office

7 6 5 4 3 2 1 0

Years

Figure 5. Source: Database of Political Institutions (Thorsten et al., 2010)

Following the theory, however, the trend should be opposite. According to Grilli et al. (1991, 349), governments that last only few months or years should have a shorter time horizon and therefore they disregard the future. As a consequence, they have incentives to pursue expansionary policies in order to maximize their support among voters.

In the case of Italy, governments adopted policies to reduce expenditures when the average duration was extremely short and definitely below the natural duration of a term (five years). Only after 2000, governments managed to stay in power for

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longer. In 2001, Berlusconi stayed in power until 2005, becoming one of the longest governments in power in the history of the Italian republic (Italian Government, 2012). Yet, the increasing lifespan of these governments did not coincide with policies aimed at reducing the deficit or concerned with the budget. Instead, it the opposite happened, governments increased expenditures.

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27

Related to the duration of each government, it is also important to consider the fraction of seats held by the government in the parliament. If the duration of .

governments has increased, but their majority has decreased, they may have encountered problems in passing decisions. In addition, as stated before, if it is harder to get to a decision, there are more possibility that a government is unable to adopt policies to reduce the debt or policies at all (Eslava, 2011, 648).

However, also in this case, the data do not support the expectations. The fraction of seats held by governments actually increased after 2001 (see Figure 6 and 7). In other words, governments between 1994 and 2004 managed to adopt policies to contain expenditures despite not only the fact that their duration was really short but also with a thinner majority than governments of early 2000. For example, Italian Communist Party, Partito Demoncratici di Sinistra and Democratici di Sinistra obtained 167 seats in 1196. Instead, Forza Italia alone obtained 189 seats

Seats of the governmeant party to Total number of Seats

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in 2001 elections (Ignazi, 2002, 234-235).

0,65 0,6 0,55 0,5 0,45 0,4

Years

Figure 6. Source: Database of Political Institutions (Thorsten et al., 2010)

28

Mittestainer, Alberto. Italy between the EU and Berlusconi: Effects of external and internal factors on the Italian Public Debt : Effects of external and internal factors on the Italian

Number of Seats of the Bigger Party

400 350 300 250 200 150

Years

Figure 7. Source: Database of Political Institutions (Thorsten et al., 2010)

Another possible indicator is the level of fractionalisation in the government and in the parliament. In the parliament, fractionalisation is measured as “The probability that two deputies picked at random from among the parties in the parliament will be of different parties” (Keefer, 2010, 14). For government fractionalization, only parties among the ruling coalition are taken into account. According to the models, an increasing level of fragmentation tends to produce expansionary policies (Roubini et al, 1989, 126). Thus, between 1994 and 2004, the level of fragmentation should be lower than after 2004 because governments managed to

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reduce public debt.

Yet, also in this case, the data do not comply with the theory (see figure 8). Both parliamentary fractionalisation and government fractionalisation remain constant between 1995 and 2008. Fractionalisation does not seem to have played a role in the variation of the Italian public debt.

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0,8 Level of Fractionalisation

0,7 0,6 0,5 0,4

Government frac

0,3

Parliament frac

0,2 0,1 0

1994 1996 1998 2000 2002 2004 2006 2008 Years

Figure 8. Source: Database of Political Institutions (Thorsten et al., 2010)

It is important to note that before 1995 and after 2008, fragmentation is higher since the ruling party is supported by other parties without forming a formal coalition. Formal coalitions were, instead, formed between 1995 and 2008 such as Ulivo and Casa della Libertà (Italian Government, 2012). Finally, it is also useful to investigate what electoral systems were behind this different level of fragmentation. As already discussed, a proportional system favours fractionalisation while the opposite is true for a plurality based system. Overall, the system has been mainly characterized by a proportional system both

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after the 1993 reform and the 2005 reform (Minister of Interior, 2005). Yet, the only elections held with that system have been in 2006. Therefore, between 1994 and 2006 there has always been the same electoral system. Again, the electoral system does not seem to have affected the public debt level.

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Mittestainer, Alberto. Italy between the EU and Berlusconi: Effects of external and internal factors on the Italian Public Debt : Effects of external and internal factors on the Italian

Before moving forward with these models, however, it is possible to verify them in a more direct way. As previously mentioned, macro data may have not explanatory power due to its shortcomings. Indeed, in the next section, the parliamentary debates on the yearly budget will be analysed in order to verify what was the actual level of polarization and the role of veto players. It is possible to expect that between 1994 and 2004, members of the parliament showed similar positions on economic policies compared to the period after 2004; thus, fragmentation did not play a role.

4.3 External Constraint Parliamentary debates and newspapers articles will also help verify what the role of the external constraints of the EU and the Maastricht Treaty. Indeed, a possible alternative explanation is that all political parties between 1994 until 1999 agreed of the necessity of Italy to join the EU and to respect Maastricht parameters and therefore reduce the primary expenditures. After 1999, however, Italy was part of the EU and therefore the period of collaboration ended thus causing an increasing level of public debt.

The role of the EU as external constraint over Italian politics is popular among commentators and the public. Italy has been depicted as an underage child unable

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to take care of himself without the help of someone else. The European Union is thus the authority that pressured Italian governments in the past in order to make them abandon expansionary economic policies (Panebianco, 2012a and 2012b). In more detail, the theory is that in order to become member of the European Union, Italy has to adopt reforms and decisions that put an end to the expansionary policies adopted so far (Panebianco, 2012a and 2012b).

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The Maastricht Treaty (7th February 1992) set the conditions that the country has to meet in order to become part of the European Union. Among the criteria to meet, five became particularly well known: rate of inflation of less than 1.5% compared to the rate of inflation to the three countries with the lowest inflation; rate of interests not superior of 2% than the average in the Union; an exchange rate under control; a public deficit of no more than 3% of GDP and a public debt of not superior of 60% of GDP (Di Palma et al. 2000, 304). Italy, as the other countries, could comply with these parameters even though not strictly met. For example, regarding the public debt, it was possible to demonstrate that the debt was sharply decreasing although it was not below 60% of the GDP (Di Palma et al, 2000, 304). In addition, in 1996 the Stability and Growth Pact introduced some criteria that members of the Economy and Monetary Union have to meet (Di Palma et al., 2000, 305). Italy managed to be among those countries that became members of the EU since the beginning in 1999 (Signorini, Visco, 2002, 91). According to the European Commission Convergence Report (1998, 22), Italy had low inflation, low interests rate and also the deficit was under control. The problem was the high public debt, higher than 60% of GDP. However, that parameter was also considered met since the debt was decreasing.

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Political parties may have felt compelled to adopt policies to meet the criteria because they thought that not being member of the EU would have produced negative effects on Italy and, as a consequence, reduce the support they enjoyed among voters. In addition, in the 1990s new economic ideas influenced political parties in favour of economic stability and the necessity to join the EU (Di Palma

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et al., 2000, 395). Thus, political parties accepted unpopular decisions such as reducing primary expenditures that they would not have accepted in normal times.

In the next section, this theory will be put to the test. If it succeeds, it should be possible to find, in parliamentary debates and newspapers, references to the necessity to join the European Union and to leave aside political differences in

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order to reach the goal.

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Chapter 5: Qualitative research 5.1 Methodology In the previous section, it has been showed that the opportunistic and partisan models can’t explain why public debt in Italy has increased and decreased between 1994 and 2004. Instead, models based on political institutions had possible explanatory power at least theoretically. However, using macro data, it was possible to observe that the variation of parameters such as fragmentation and years in power showed a pattern opposite to that expected. In other words, according to the macro data, the public variation should have been different: between 1994 and 2004 the debt should have increased while after the 2004 the debt should have decreased. The impact of polarization and veto players was not verified.

Another possible explanation that has been suggested is the role of external constraints. The European Union and the Maastricht Treaty may have played a role: Italian politicians agreed to reduce the debt in order to enter the EU. Once Italy became a member, the agreement among policy makers was over. It is not possible to find macro data that verify this hypothesis.

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At this point, an explanation of the variation of public debt is still missing. Macro data did not support the models on political institutions and it was not possible to verify the external constraints theory. In this section, the goal is to perform a qualitative analysis of parliamentary debates in the lower house and newspaper articles. The budget must be approved in December of every year. The goal is twofold with the first goal being to verify whether the models on political institu34

Mittestainer, Alberto. Italy between the EU and Berlusconi: Effects of external and internal factors on the Italian Public Debt : Effects of external and internal factors on the Italian

tions have explanatory power. In more detail, did the level of polarization decrease in the first period and increase in the second period, despite the already considered parameters such as fragmentation and stability.

Second, it will also be verified if the external constraints theory holds. If it does, it should possible to note in the parliament a widespread consensus on the measure that respect what was desired abroad. Once the requirement has been met, that is Italy is member of the European Union, it should be possible to note policy makers returning to the usual disagreement.

In the yearly debate on the budget, if the level of polarization has decreased, it should be possible to note an overall agreement among the parties of the coalition. In addition, also in the whole parliament, there should not be many differences among the positions of the parties. Newspapers should also report of cooperation among politicians.

If the level of polarization has increased, it should be possible to note strong disagreement on what policies to adopt for the budget both among coalition parties and in the parliament as a whole. Thus, it should be harder to pass the budget at the end of the year also because veto players, such leaders of the party

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in the ruling coalition, oppose measures proposed by the leader of the coalition. Newspapers should report of disagreement among politicians. If the polarization model holds, it should be possible to observe a low level of polarization between 1994 and 2004 and a higher level of polarization after 2004.

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Instead, if the theory of external constraints holds, in the parliamentary debates between 1994 and 2004, the members of parliament of all parties should express the need for Italy to become member of the EU and all the veto players should support those decisions that make it possible. Also newspapers should report of a general consensus on the goals and actions that Italy should take. After 2004, it should be possible to note a decreasing level of cooperation and agreement among parties. Since the goal of being member of the EU was achieved, parties may have returned to the normal contraposition.

If the theory does not hold, there should be no difference between the two periods. In the debates, member of the parliament should refer to the EU in the period as much as in the second period. Newspapers should report of a different attitude of politicians before and after Italy has become a member of the EU.

5.2 Findings The analysis of parliamentary debates of the lower house on budget for each year from 1994 to 2007 showed that the external constraints of Europe has played a major role in shaping the policies adopted in the parliament until 2001. In the debates, between 1994 and 2001 the Maastricht parameters are often cited and there is agreement among MPs that Italy has to adopt measures to reduce the

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public debt. Also according to the newspapers, there is cooperation, or at least no opposition, to the measures needed to comply, with the parameters such as the reduction of the public debt by cutting primary expenditures. After 2001, in the parliamentary debates, the Maastricht treaty became a point of disagreement among parties and later it disappears almost completely from the debates.

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However, the level of overall polarization within the coalition and in the whole parliament remains constant in both time periods. It is particularly high between 1994 and 2001, with political parties often declaring that the measures proposed by other parties are negative and do not suit the needs of Italy. Yet, despite the big differences among parties, they vote in favour of those decisions necessary for Italy to become member of the EU, still declaring that in other times they would have voted against. In some cases, parties agreed to wait to pass decisions to reduce the debt and then made the government collapse.

The level of polarization remains really high also after 2001. Despite Berlusconi’s government remaining in power for the whole 5 years, it often had to deal with different position of the major ally, Northern League, and with the opposition of the centre-left. Berlusconi had to keep working to maintain the cohesion in the majority and avoid that veto players such as the leader of the Northern League delaying or nullifying the measures preferred. In order to do that, he has to give concessions to the League and overall adopted those policies that before 2001 were not taken into consideration because the EU. 5.2.1 First period (1994-2001) Between 1994 and 2001 there are five different Prime Ministers. In 1994, there is

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the first government of Berlusconi, followed in 1995 by the technocratic government of Dini (Ignazi, 2002, 167-179). Between May 1996 and June 2001, the government is always the result of a coalition from centre-left. The prime ministers were Romano Prodi, Massimo d’Alema and Giuliano Amato (Ignazi, 2002, 179-192). In 2001 Berlusconi came to power again and will remain in office until 2006 (Italian Government, 2012).

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There are many examples of the high level of polarization in the coalition and in parliament. In December 1994, during the parliamentary debate, MP Zacchera attacked the opposition. According to the member of Alleanza Nazionale, the centre-left opposition has only tried to delay the approval of the budget but without suggesting any alternative to it. The differences are so big that the MP argued that members of the opposition have called other MPs “dirty rats”. In addition, Zacchera argued that the opposition has tried to destroy instead of working with the government to write a better budget plan (Italian Parliament, 1994, 7236-7238).

Overall, parliamentary debates are dominated by loud and intense demonstrations (Italian Parliament, 1994, 7229 and 7239). Also in 1995, when a technocrat is in power, there is strong disagreement among the parties (Italian parliament, 1995, 18809-18812). The disagreement is so strong and the coalition so instable that the government has to use the vote of confidence in order to be able to pass the budget (Ceccarelli, 1995, 2).

In the 1996 there is a new government lead by Romano Prodi. The level of polarization and disagreement among the parties has not changed. In the coalition, different positions among the MPs of the same party are evident. For instance,

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there is a clash between the Undersecretary of Treasury, Filippo Cavazzuti, and a member of the party in the government coalition Democratici di Sinistra, Famiano Crucianelli, on a procedural motion. The opposition immediately attacked saying that the there is no majority (Italian Parliament, 1996, 10253-10254). The level of polarization in the government coalition remains high throughout all the years the

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Mittestainer, Alberto. Italy between the EU and Berlusconi: Effects of external and internal factors on the Italian Public Debt : Effects of external and internal factors on the Italian

centre-left is in power. This also explains why between 1996 and 2001 there are three different prime ministers. In December 1997, the last budget is approved by Prodi as the prime minister. In the coalition, the divergence is extremely strong. According to MP Luzi (1997, 1), the divisions are obvious and many commentators expect the government to last only few more months. In the debate for the political budget, the opposition attacked the government, unable according to them to be cohesive and make decisions (Italian Parliament, 1997, 9).

The whole parliament, however, is very polarized. For instance, Alberto Lembo, member of the Northern League, compared Prodi to Hitler and harshly criticised agriculture measures adopted by the government (Italian parliament, 1997, 6). Perretti, member of the Christian and Democratic Centre which was in the opposition, said that the economic measures in the budget are not enough to promote growth and development in Italy (Italian Parliament, 1997, 55). When D’Alema took the place of Prodi in 1998 and April 2000, the level of polarization in the parliament did not change. In an interview for the newspaper Corriere della Sera (Latella, 1998, 3), D’Alema tried to assure the people that the government will be able to continue despite the disagreement between Democratici di Sinistra and Partito Popolare Italiano, two parties of the ruling coalition (ibid.). The opposition, in the meantime, strongly attacked the decisions of the

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government (Italian Parliament, 1998, 11-13; Italian Parliament, 1999, 3-7). In 2000, when Giuliano Amato was prime minister, cohesion in the ruling coalition was getting weaker and weaker (Ignazi, 2002, 216-217). In addition, the opposition was highly critical of the economic measures in the budget and claimed that

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the centre-left governments of the last 5 years had only reduced the wealth of Italian citizens (Italian Parliament, 2000, 275-276).

Finally, in 2001, Berlusconi returned to office. The major ally, the Lega Nord, is already and will be often in disagreement with Berlusconi. In the budget debate, the party manages to get many concessions from Berlusconi in exchange for the approval of the budget (La Repubblica, unknown author, 2002, 2). The disagreement among parties also produced an incredible series of changes to the budget measures, up to about 1500 voting sessions have been held (Italian Parliament, 2000, 162).

Between 1994 and 2001, levels of polarization were extremely high. Parties belonging to the ruling coalitions had different ideas and positions on economic issues and the opposition was always very strong. However, it is possible to note that when the economic measures regarding meeting the Maastricht Treaty parameters, such as decisions to reduce the primary expenditures, the different parties agreed to support them. In the debates, they publicly stated their opposition to those measures, but they claimed that they have to vote them because they are necessary that those specific measures were not as negative as others.

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In 1994, during the debate for approval of the budget, Gianni Francesco Mattioli, member of the opposition, attacked Berlusconi’s government. He claimed that the Prime Minister is not doing enough to promote growth and that Italy is in bad economic conditions (Italian parliament, 1994, 7233). Yet, he also said that the opposition will be responsible. They will vote in favour of the economic measures

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suggested by the government because they are necessary. In addition, he said that this responsible attitude has been adopted not only that day but during the entire legislative process such as, for example, in the Committee for the Treasury (Italian parliament, 1994, 7235).

Not every member of the opposition agreed with this interpretation. The Communist party adopted a more radical position and voted against the measures to reduce the debt. However, a member of the party, Luigi Marino, attacked the other parties of the opposition saying that they are supporting the government while they should vote against it (Italian parliament, 1994, 7238-7240). This shows again how the opposition, regarding some economic measures, did not oppose the government. One year later, with the technocratic government in power, the debate on the budget is dominated by the Maastricht Treaty issue. The opposition, in this case, raises weak critiques of the government. For example, Forza Italia argued that the reduction of expenditures is lower than what the government had said. It seems that they are critical not because of the measures but because that is the role they have (Italian Parliament, 1995, 18892).

In 1996 and 1997, government Prodi made the Maastricht Treaty a priority in the political agenda. Also in the parliamentary debate, many MPs reiterated the

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importance of joining the EU (Italian Parliament, 1996, 10256). And again, among the opposition, some parties perceived that there was hidden support for the government which can be explained by the shared support for the EU. A MP and member of the Lega Nord, for example, attacked the other parties of the opposition because, according to him, they did nothing in parliament. They did

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not vote against the government but they did not propose alternatives either (Italian Parliament, 1996, 10244). In 1997, the goal of the EU seems particularly close to the all Italian media (Luzi, 1997, 7)

Despite some parties’ disagreement with the government, their opposition is weak in order not to slow down the approval of the budget. The words of Teresio Delfino, member of the Catholic and Democratic Centre which is not part of the government coalition, capture a common position in the parliament. He said that the party does not agree with the government, but he would not start a delaying opposition (Italian Parliament, 1997, 56).

In 1998 and 1999 the debates showed a change in the approach towards the EU. Already in 1998, in fact, there is the feeling that Italy made it into the EU. Now, what Italy needs is to keep adopting sound policies in order to stay in the club of European countries (Turani, 1998, 27). In the governing coalition and in the opposition, there are appeals to responsibility and to not think that Italy, because it is member of the EU, does not need sound economic policies (Italian Parliament, 1998, 48; Italian Parliament, 1999, 18).

Also in the last two years of the period considered, although Italy is a member of

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the EU, the majority of the political parties claimed that it is still necessary to keep the budget and the debt under control. In other words, they seem to say that there is no reason why the efforts to reduce the debt should stop now that Italy is part of the EU. In the 2000 debate, for example, MP Lucio Testa who belongs to the governing coalition, and MP Dario Galli, member of the Northern League,

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both stressed the importance of keeping the public debt under control and to promote sounds fiscal policies (Italian Parliament, 2000, 60; Italian Parliament, 2000, 274).

Also in 2001, political parties supported the idea that the efforts to reduce public debt and primary expenditures should not be abandoned. For example, Roberto Barbieri, member of the ruling coalition, affirmed that the work done in the last year to become a member of the EU should continue in order to confirm the position of Italy in Europe (Italian Parliament, 2001, 195-196). This is, however, the last year when the EU played a big role in the debate

From 2002 on, the parliament focused on other issues or only used EU to support other goals. From 1994 to 2001, it is possible to note that level of polarization is high, both among governing coalition and in the whole parliament. Parties often disagreed on the best policies to adopt and strongly criticised other ideas. However, when voting for measures that should have brought Italy in to the EU, such as the reduction of primary expenditures, political parties tended to disregard their critical positions or claimed that the measure was necessary. It seems, thus, that the EU was an external constraint that made parties find a point of convergence.

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5.2.2 Second Period (2002-2007) In the second period considered, from 2002 to 2007, a government of the centreright is in power for five years. From 2002 to 2006, Berlusconi is the prime minister and leader of a coalition of parties coming from the centre to the right of the political spectrum. Considering only the last years of the period, there is a centre-left government in power with Romano Prodi (Italian Government, 2012).

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As in the first period considered, the level of polarization remained high. Parties among the governing coalition and in the parliament often supported different positions regarding the best measures to adopt regarding the budget. In the debates, veto players among the leading coalition often have different positions from the leader of the government.

The difference from the first period, however, is the absence of references to Europe in the debates. The parameters of Maastricht, the European Union and the Stability Grown Pact (European Commission, 2012) tend to be absent from the debates. The focus has shifted to national issues such as poverty, competitiveness and unemployment. It seems, thus, that the effect of the European Union has faded away and politicians did not feel the external constraint anymore.

During the first four years considered, Berlusconi is the prime minister of the coalition Casa delle Libertà. Although he changed the composition of his government only once, he has to deal with the opposition and disagreement from allies, especially of the Northern League, throughout his whole term. In the first three years, the government relied heavily on the use of the vote of confidence on the budget (Unknown Author, Corriere della sera, 2002, 1; Italian Parliament, 2003, 4; Sensini, 2004, 1). The main purpose of the vote of no confidence is to avoid

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members of the coalition not following the instructions of the government and voting with the opposition. In other words, it increases the cohesion in the governing coalition. Yet, it also demonstrated the low level of trust of Forza Italy, Berlusconi’s party, by the Northern League, the other biggest party in the coalition.

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The high level of polarization is evident among the parties and veto players, such as the leader of the Northern League Umberto Bossi, obstructed the work of the government. The Northern League had different positions regarding mainly the treatment of the North of Italy compared to the rest of the Italy. Sometimes, the disagreement was so strong that members of the party did not want to vote with the government (Italian Parliament, 2003, 29).

During the Berlusconi government, the opposition attacked the government often on many issues. In particular, the parties of centre-left often suggested different measures because they claimed that the government was favouring those people that did not pay taxes or that did not comply with the rules (Ardu, 2005, 38).

In 2006 and 2007, Prodi’s government faced the same difficulties. On the one hand, some members of the coalition had different ideas and positions on economic issues. The Communists, in particular, were promoting measures strongly in favour of the working classes and poor people (Italian parliament, 2006, 11). In 2007, the coalition was so weak that Prodi had to use the vote of no confidence three times in order to be sure to obtain a favourable vote (Italian Parliament, 2007, 17).

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On the other hand, the parties of the opposition attacked the economic measures proposed by the government because they thought that they wrongly use the resources and cut key strategic assets of the country such in the education and health (Italian Parliament, 2007, 17). If the level of polarization remained high in these years, as in the first period it is not possible to say the importance of the EU

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and the respect for the parameters set by the Maastricht Treaty and by the Pact of Stability and Growth were the same.

The parameters of Maastricht almost completely disappeared from the debates. Only in 2004, the MP Luigi Pepe, member of the opposition, claimed that the government stopped adopting measures to promote sound economic measures as was done between 1994 and 2000 (Italian parliament, 2004, 11). Other references to Maastricht or the European Union are part of broader arguments that do not promote measures to reduce the public debt or the primary expenditures but rather other economic aspects. In 2004 Luigi Pepe, member of the opposition, attacked the government saying that Italy should spend more in research and innovation such as the other European countries do. In 2006, as another example, MP Adriano Musi of the governing coalition claimed that Italy needed to invest more in infrastructure to meet the standards in the rest of the European Union (Italian parliament, 2006, 104). It is clear, therefore, that the European Union is no longer the priority of MPs. As a consequence, the external constraints have lost their powers and the parliament is back to promoting interests and measures based on national interests.

These findings seem to confirm that a role was played by the European Union and

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Maastricht Treaty in reducing the debt of Italy. The public debt started increasing around 2004, while according to the debates and newspapers, the theme of the European Union disappear around 2001. Yet, it is possible that the cuts in the primary expenditures had a longer effect until 2004 and abruptly stopped in 2001.

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On the other hand, there are no findings confirming that polarization played a role in the reduction of public debt. Polarization in the two periods considered has always been very high and therefore cannot be used as variable to explain why the

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variation happened.

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Chapter 6: Conclusion This paper has investigated whether the reduction of the public debt in Italy between 1994 and 2001 and the increase after 2001 was due to internal or external factors. This is an important question because sheds light on whether Italy or other states can handle their fiscal problems or if they need external help. This is a relevant issue given the current debt crisis in Europe that encompasses not only Italy.

The findings showed that Italy was able to reduce the public debt only when pressured by an external constraint, which is the European Union in the form of the Maastricht Parameters. Instead, internal factors have not played a role, in particular the main object of study, the level of polarization has remained constant throughout the whole period considered.

The reduction of public debt between 1994 and 2001 and the increase in after 2001 have been explained considering political internal factors and external factors. Considering the international political economy literature, three possible explanations have been considered that rely on internal factors. First, variation of the public debt can be explained due to policy makers increasing expenditures in

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order to be re-elected, the so called opportunistic political business cycle; second, the variation can be explained by differences among parties with leftist party adopting more expansionary fiscal policies than rightist parties, the so called partisan business cycle; third, increasing level of fragmentation, government instability and polarization raise the chances to have expansionary policies.

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Among the three theories, the first fall short in explaining the variation in the public debt, since there are no reasons why politicians were not opportunist in the first period but then became opportunist in the second. Also the partisan cycle does not hold much explanatory power since there were both rightist and leftist government in both periods. The third type of explanation seems the most promising. However, macro data regarding fragmentation and government instability appears, again, to disconfirm this theory. The data available tend to show a constant pattern that does not have any explanatory power. Yet, another possibility is to verify directly for polarization.

The alternative is to explain the variation by considering an external factor that pressures the Italian government to abandon expansionary policies. Once the effect disappeared, the politicians went to the more usual economic policies. In the early nineties, the Maastricht parameters could have played the role of external constraint. After Italy meet the parameters and became a member of the EU, the effect decreased.

In order to verify whether polarization or the external constraints played a role, parliamentary debates of the lower house for each year on the last vote for the public budget were analysed. In addition, also newspapers articles were consid-

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ered. The findings show that the level of polarization remains high during each year considered. Both within governing coalition and the whole house, strong differences and strong oppositions among politicians are observable. It is, therefore, not possible to use polarization as an independent variable to explain variation in public debt.

Mittestainer, Alberto. Italy between the EU and Berlusconi: Effects of external and internal factors on the Italian Public Debt : Effects of external and internal factors on the Italian

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On the other hand, between 2994 and 2001 there was a clear convergence on those specific policies necessary to meet the Maastricht parameters, in particular in the reduction of primary expenditures. Politicians either openly stated that those measures were necessary or opposed them weakly. These measures were thus approved. After 2001, however, the effect of the European Union disappeared. There is no convergence on any measure and polarization dominated the debates.

The findings suggest a negative view on domestic government, at least for Italy. The decision makers are incapable of handling their fiscal problems, they need external help. Future research could study whether the external constraints have played a role in many other European countries and what could be the impact on

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the current debt crisis.

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Mittestainer, Alberto. Italy between the EU and Berlusconi: Effects of external and internal factors on the Italian Public Debt : Effects of external and internal factors on the Italian

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