Italian Prime Minister Silvio Berlusconi says he will resign, reports the AP.
The vow of resignation comes after Berlusconi lost his parliamentary majority in a routine vote on Tuesday. Italy has worried the euro zone and the global economic community with its high debt-to-GDP ratio, and agreed last week to allow the IMF to oversee its efforts to bring its debt back into balance. Berlusconi has reportedly said he will step down after parliament approves economic reforms to cut the debt and boost growth.
Fellow euro zone member Greece is undergoing a power shift similar to that in Italy. Prime Minister George Papandreou has agreed to resign as soon as the Hellenic Republic forms a unity government. According to the AP, Greek politicians say they are close to agreeing on a new government.
New heads of state make for big news. But the real changes that could help save Europe from its sovereign debt crises will happen in ledgers and on balance sheets.
"If Italy wants to get its act together, it can," says Axel Merk, portfolio manager at Merk Funds. But that will involve massive changes to Italians' way of life. Italy's generous pension system is an example. "If you work for 35 years [in Italy], you can retire with a pension no matter how old you are. Italy just can't afford that anymore. Changing these things is, of course, extremely difficult."
More important, says Domenico Lombardi, a senior fellow at the Brookings Institution, is enhancing the Italian economy's growth. "When you have a very high public debt," as Italy does, he says, "potentially [low growth] creates an explosive mix." Reducing regulatory barriers and privatizing state enterprises could be steps in the right direction, he says, but as the United States and countless other economies have shown in recent years, boosting growth at will can be a near-impossible task, particularly for a large economy like Italy's—the third largest in the euro zone.
The pressure is particularly on Italy, as the European Union's plan to leverage its bailout fund, the EFSF, is still in question after the EU recently agreed to more than double its size to $1.4 trillion.
This is not to say that the actions of leaders like Papandreou and Berlusconi haven't had wide-ranging economic repercussions. Indeed, every development surrounding Berlusconi in recent days has affected yields on Italian bonds. Trepidation surrounding the prime minister's government was quantified in near 15-year high yields on Italian 10-year notes earlier this week, with interest rates reaching 6.78 percent on Monday. Some economists say that 7 percent or higher would be unsustainable territory.
What happens from here is unclear. The markets have made their distrust of Berlusconi known, but there is no guarantee that a different government would be a better government.