The recent controversies about the private conduct of Prime Minister Berlusconi did not highlight one crucial issue at stake: the economic costs of the scandals.
The Premier’s personal affairs are likely to result in considerable public outlays. First, there are the direct costs of the “entertainments”, by now public knowledge: fees for escort “services”, air-transportation costs of party guests, and so on. To these, one must add the presumed sums awarded to the health-care entrepreneurs involved in the escort-for-favours exchange in Puglia, now under police investigation.
But the reputation costs are likely to be much more important. When the private behaviour of the Premier openly contradicts publicly professed values (god, marriage, etc.), the prestige of the institutions is lessened (as the Clinton – Lewinsky affair demonstrates). At times of crisis, such disrepute may have a very negative impact on national cohesion (why should I accept sacrifices, when the Premier has a lot of fun?). Moreover, it may undermine the country standing in the international arena, thus inhibiting the capability of supporting national economic, strategic and military interests. The economic consequences of this disrepute may be substantial, but they are difficult to quantify.
There are other indirect costs of credibility, always borne by taxpayers, which are potentially very significant. Should doubts arise in financial markets about the suitability of the Prime Minister to fulfil his role, and, as a consequence, about the cohesion and stability of his government, the perceived solvency of the State may deteriorate. As a result, interest on public debt may rise. Now, since public debt has recently topped the 1,750 billion Euros, even a few basis point rise in yields would imply substantial costs for the tax payers.
But how can we assess the existence of a (possible) “Berlusconi-scandals” effect on spreads? As an academic exercise, I have tried to approximate such effects by considering the curiosity aroused by the events of the Premier, as measured by the intensity of Google searches (1) containing keywords such as Berlusconi, Noemi (the young “friend”) , Veronica Lario (the wife) , Tarantini (the entrepreneur), Topolanek (the ex Check Prime Minister, presumably appearing naked in a picture), Palazzo Grazioli, Villa Certosa, Patrizia D’Addario (the taped escort). Google Trends allows you to obtain such data on a weekly basis. Since Italian yields on 10 bonds are obviously affected by the international markets, German and US yields are also taken into account in the analysis (2).
The results of this exercise should be considered with great caution, since they may be affected by measurement errors (not all the recent searches for “Berlusconi” necessarily deal with scandals), by the limited number of observations available (29 weekly observations from 22 Dec.2008 to 23 July 2009), and by the possibility of “spurious” correlation (if, for example, students with long hair have better marks than those with short hair, one can harldy improve his vote by letting his hair grow).(3). That said, the evidence seems to suggest the existence of a positive and statistically significant relationship between the weekly return on Italian 10 years government debt (on the y-axis in the graph below) and the search intensity for “Berlusconi” (on the x axis)
Partial Correlation between 10 yield and “Berlusconi” (t-1) *
Taken literally (and admittedly, provocatively), the estimates suggest that should the rise in interest rates attributable to the Prime Minister’s scandal extend to the whole yield curve, and thus apply to the entire stock of outstanding debt, the additional burden for the budget would be of at least 593 million euro, (5) just over half of the funds allocated for the reconstruction of earthquake-stricken Abruzzi in 2009.
Even with all the precautions required, the question arises: can the country afford such a “dear” Prime Minister?
(1) Google Insights has recently been used, for example, by Hal Varian Hyunyoung and Choi, (2009), “Predicting the Present with Google Trends’,
(2) In the exercise, the Italian yield in Italy is explained by Germans and Americans 10 YR yields (Benchmark Bonds – Redemption yields, Source: DataStream), a lag, a linear trend, and the Google Trends variable lagged one period (week). I thank you Giulio Trigilia, of the University of Bologna, for the availability of data.
(4) The other keywords (Noemi, Villa Certosa, Tarantini, Topolanek,, Palazzo Grazioli, and Veronica Lario) are not significant, however. Google Trends does not have sufficient observations for Patrizia d’Addario and Villa Certosa.
(5) To evaluate the burden on public finances, I calculated the difference between the average search intensity on Berlusconi in the last 15 weeks relative to the average since the beginning of the year = [Berlusconi DELTA] = [1.698889-1.104095] and then I applied the smallest coefficient in the 95% confidence interval , emin = .0006077. Thus the estimated effect of minimum impact is = emin x [DELTA Berlusconi] x debt = .0006077 x [1.698889-1.104095]x1750 billion
7 Responses to “Berlusconi: Private Leisure and Public Costs of the “Sultan of Swing””
Mr Manasse,your analysis miss the point. Berlusconi , as prime Minister of Italy, is the answer to the big debts that previous governments have produced in all sectors of the life of italian citizens
Well, I frankly cannot say if he is the answer to the debts of previous governments (centre-left goverments, under Mr Prodi, also belong to the post-christian democratic era, responsible for the debt). But surely public debt has kept rising during all his terms in office(not only the current one)…
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Indeed Berlusconi was elected in 1994 as prime Minister for the same reasons ( public debts). Actually, it seems to me that the election of a free market government do not guarantee a free market policy if you have to give money to a public system that is pervasive of economic life of italians and i am meaning that you have to guarantee money to municipalities, to provinces, to regions,etc and the most part of these institutions are producing only ever large debts.Bottom line: i guess that we have to return to the times of Einuaudi in order to get a good government. At that time the italian lira was one of the strongest currencies and we had no debts. I remember one last thing: at that time my municipality had only 3-4 salaried persons.Now the same municipality is the bigger employer ….
I agree, the question is: how do we put our clock-arms backward to Einaudi’s time?
Mr Manasse,your analysis is only partially acceptable and your considerations for what concerns the italian public debt and the Italian political cost are partial as well. The first point is missing of a sound scientific approach, I mean strict evident correlations between facts and causes, as you yourself admit by moderating your statements with: “As an academic exercise”; “The results of this exercise should be considered with great caution”; “the possibility of “spurious” correlation”. Hence the academic scientific value appears nearly nil.For what concerns your key question: “can the country afford such a “dear” Prime Minister?. My answer is YES we can and we must, because the center left is so broken down, and is so tight to the opportunistic economic advantage that the small parties can get and benefit of, that doesn’t have the capability of getting united and form a government to lead and reconstruct the country politically and administratively.Certainly the center right has to afford critical political and administrative problems like: the compensation of the MoPs which is two to four times the ones of the other European countries, the one of the magistrates; the number of MoPs which is the highest on a pro-capite base and the number of the central and local administration members; the nomination of legally clean and honest members candidates; etc. Aside from these points we should recognize, among the others, that the Berlusconi government has done some good things like: the Brunetta rules for the public administrative employee (unfortunately this doesn’t apply to the MoPs); the long term supply of energy, either with the construction of new nuclear plant, as well with good relationships with the energy supplying countries; the good Tremonti financial administration plan, the effective Maroni internal affair administration; the Gelmini restructuring of the educational system; etc.
may be we have an answer very near to us : the Switzerland