By ABC's Alan Kohler

Photo: At the weekend Italy's former prime minister Silvio Berlusconi announced he was going to run for the job again. (Reuters: Tony Gentile)

Political instability is usually followed by a weakening currency. But in the current global economic turmoil, Australia faces a different set of challenges, writes Alan Kohler.

Business confidence in Australia is now worse than it is in Italy. In fact Australian businesses are among the gloomiest in the world.

Italian business confidence actually improved in November although it will probably crash again in December after prime minister Mario Monti resigned over the weekend when Silvio Berlusconi announced he was going to run for the job again.

But superficially at least Italian businesses have something to be glum about, with their economy in the middle of a two-year recession. Australians have a growing economy, falling interest rates and a government definitely going full term and likely to be replaced by a party led by someone who is not a 76-year-old convicted tax fraudster with a taste for bunga bunga and demagoguery.

The difference between Australian and Italian business confidence, perhaps, is that for 12 months Italy has had an unelected prime minister and a cabinet composed of people who know what they are doing, as opposed to politicians. It's also had a weak currency, although not as weak as Italian businesses need to be competitive. And by the way the Monti government hasn't actually done any reform - just impose some fiscal austerity.

But businesses don't like politics and whereas the Italians have had a holiday from it for 12 months, Australians have had it up to here for three long years - nothing but mad, hysterical politics, day in, day out. And a strong currency.

So what we are seeing in Australia is the effect of a very unusual double whammy: political instability coupled with a strong currency.

Usually the first leads to the opposite of the second, but unfortunately the credit ratings agencies don't watch Question Time in Federal Parliament: if they did they would have cut Australia's credit rating several notches below AAA long ago.

As it is, Australia is a AAA-rated safe-haven alternative to US dollars with relatively high interest rates, thus $AU1 - $US1.05.

The currency and chronic politics fatigue syndrome (PFS) are the Australian economy's biggest enemies, and neither is likely to end soon. In Italy they are about to get a dose of the same medicine, with Silvio Berlusconi running for PM again, and the US redoubling efforts to get its currency down versus everyone else's, but especially the euro.

And overlaying all this is the global balance sheet adjustment, by which I mean the determination of governments and households alike to reduce their debt.

Governments everywhere, including Australia's, are struggling to reduce their budget deficits. But this only works if the household and business sectors step up and adjust their behaviour to accommodate the public sector retrenchment, in which case the changes to government spending and taxes have a small multiplier.

But in fact households are also cutting back and businesses are wary and anxious. The result is a large multiplier. As a result, fiscal austerity is counterproductive: the more governments cut back, the weaker their economies get and the worse their budget position becomes.

That's what is happening in Australia, although the fiscal multiplier is only a small part of the problem. The main problem is the strong currency and the looming end of the mining investment boom.
But it could be worse. We could have Mr Berlusconi on the campaign trail.
Alan Kohler is editor in chief of Business Spectator and Eureka Report as well as host of Inside Business and finance presenter on ABC News. View his full profile here.

Australia's economic double-whammy - The Drum - ABC News (Australian Broadcasting Corporation)