Berlusconi’s Surge Shows Why Europe Needs a Deeper Union

The return of Silvio Berlusconi to the Italian political stage sends an unmistakable message to Europe’s leaders: They will have to be a lot more ambitious if they want to hold their currency union together.

In parliamentary elections this week, Italian voters handed Berlusconi just enough power to make forming a stable government extremely difficult. In doing so, voters soundly rejected the technocratic policies of outgoing Prime Minister Mario Monti, whose efforts to raise taxes, cut pensions and curb budget deficits helped bring the government back from the brink of insolvency. One in four Italians further rebuffed Monti’s austerity diet by voting for a comedian. Stock markets plunged, and the yield on Italy’s 10-year bond rose to 4.9 percent, its highest level since November.

The turnaround illustrates the complicated game Europe’s policy makers are playing as they seek simultaneously to calm nervous markets and to push the euro area’s afflicted members to repair their finances. To make solvency achievable for countries such as Spain and Italy, the European Central Bank has rightly pledged its unlimited support to keep borrowing costs down. By removing the threat of imminent financial Armageddon, however, the ECB’s support has taken the pressure off voters to keep approving austerity policies that are driving their economies into recession.

The euro area also needs a better way to keep its members’ borrowing in check. Jointly issued and collectively backed euro bonds, for example, have the potential to lower borrowing costs while giving a central authority significant control over individual governments’ ability to run budget deficits. Interestingly, this idea is supported by German Chancellor Angela Merkel’s main opponents in elections scheduled for September.

All the best solutions to the euro crisis have one thing in common: They involve the creation of a much deeper union. It’s up to Europe’s leaders -- and particularly Germany’s -- to convince their constituents that such a union is in their best interests.

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