Don't cry for me, Berlusconi

So Silvio Berlusconi has promised to resign and everyone is over the moon because hey, ho, the witch is dead. I'm not so convinced.

Matt Yglesias gets at the nub of the problem when he says that we're seeing a sort of coup by Davos Man.

That's an intentionally provocative way to look at it. In particular, I think it underplays the fact that Italy ceded a lot of its sovereignty in these matters the moment it gave the ECB control of its monetary policy. Bad monetary policy can provoke crises that cause governments to topple, and there doesn't need to be any great conspiracy behind it.

But what's exactly right is that the disturbing thing in this is not Berlusconi's economic policy, but the manner of his removal.

Look: Silvio Berlusconi is one of the worst leaders of any modern democracy, a sleazy, corrupt showman whose grip on Italian public life is an embarrassment to the country. But saying this is all his fault will lead people to think that removing him will sort Italy out, when in fact this problem needs much more than a stern technocrat with a magic wand.

The fashionable thing to say is that Berlusconi's years of mismanagement have left Italy's economy growing too slowly to pay off its debt burden, and therefore this is all his fault. But it's simply not true.

For most of the two decades since Maastricht, Italy's GDP growth was sluggish, but average for a big euro zone economy, and certainly faster than Germany's. Its deficits, likewise, were pretty much in line with its peers, and rarely more than a percentage point bigger than best-in-class Germany. Take away payments on its debt, and it's been running a surplus for years.

Italy had problems, sure, but ones it shared with much of the the rest of the euro zone: slow growth, low female employment, a frigid birth rate; plus a few of its own, such as corruption, high inter-generational and inter-regional inequality. The reason it's in crisis now, though, is that the ECB has jacked up interest rates in the middle of a slump, to the point that Italy's hitherto manageable debt is spiralling out of control despite last week's cut.

What you have here is a classic speculative crisis, where some investors are prepared to bet heavily that they can outstare a central bank in a game of chicken. It's very much like the moment when George Soros broke the Bank of England in the 1993 Black Wednesday crisis.

The ECB has a nuclear weapon: it can create as much money as it wants and buy as much Italian debt as the market will sell. If it's prepared to use that weapon, then the buyers of Italian debt will be rewarded and short-sellers will be flattened. But it's afraid to use its own balance sheet, and its insane governance structures mean it's probably incapable of doing so.

The more lightly-armed speculators are smelling blood, betting that Frankfurt will suffer a failure of nerve rather than fight them off. If they win--something that's now looking increasingly likely--the euro will be history and the ECB will have written its own epitaph.