How Silvio Berlusconi could give your portfolio a boost

Eighteen months ago everyone was certain that the euro would collapse. The only question was who (or what) would finish it off.

Would it be Greeks rebelling against austerity? Or bondholders angry at having to accept voluntary' haircuts? There was even talk of Germany splitting to form a neuro' with Finland and other like-minded countries.

But fast-forward to today, and amazingly the euro is still intact. Bluster aside, no one has been willing to pull the trigger and detonate the single currency the politics still favour clinging to the euro.

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Of course, it's helped that Mario Draghi, head of the European Central Bank (ECB), has threatened to do "whatever it takes" to keep the currency intact. As yet, Draghi has not been forced to back up that promise with any real action. In fact, the euro has strengthened against both the pound and the dollar in the last year.

But that could be set to change. All thanks to one man Italy's former prime minister Silvio Berlusconi. And that could be very good news for investors in European stocks here's why

Why Berlusconi is so worried about being banned from politics

Italy's inconclusive elections this summer left the country governed by a rickety coalition, formed between the two main parties, the PDL and the Democratic Party. Berlusconi heads up the PDL.

Now, these two main parties themselves are broad coalitions, with extremists on both left and right. Imagine trying to run Britain with a coalition formed of Ukip and the Conservatives/Lib Dems on one side and Labour and the Greens on the other. That gives you a small idea of how messy the situation is.

It only needs one misstep for the whole thing to collapse. And it looks like that's what we're about to get.

Last August, the Supreme Court upheld Berlusconi's conviction for fraud. As well as a one-year sentence, he faces being stripped of his seat and banned from politics.

We're not talking hard labour here. Berlusconi has the choice between either serving his sentence in his own mansion, or doing some community service'.

But the political suspension has far more serious implications for Il Cavaliere. Firstly, as an ordinary citizen, it'll be much easier to prosecute him for other potential crimes. That could end up meaning genuine jail time. Then there's his huge media empire, which could easily be broken up under competition rules.

In short, unless he pulls something dramatic out of the hat, he could potentially lose everything.

So Berlusconi's best hope is to push for an early election in Italy, in the hope that a new government could grant him an amnesty, or scratch his back in some other way.

And that's just what he's doing. At the weekend he vowed to pull his party out of the coalition, and called for fresh elections. Five ministers from his party immediately quit their posts.

This isn't just about Berlusconi's political woes

Now, Berlusconi's actions do not automatically mean the end of the government. The ministers who quit did so under protest. Some of them have even dropped hints that they might try to replace him as party leader, or even form a new party. And many of the MPs remaining in his coalition are considering defying him, and supporting the government in any vote of confidence.

However, there's a bigger issue here too: the Italian economy is still going backwards. A few weeks ago, growth figures for the second quarter were revised down. They now suggest that the economy shrank by as much as 0.3% in the second quarter of the year, down 2.4% on two years ago.

Other figures tell a similar story. Retail sales are shrinking. Unemployment remains very high at 12%. And the latest figures on the deficit suggest that Italy's government is struggling to close the gap between what it raises in tax, and the amount it spends. In short, the economy is still in trouble.

And Italy is not the only eurozone country with political problems. Portugal's government took a battering in local elections. And in Greece, a government crackdown on the neo-Nazi Golden Dawn, the second-largest party, could also lead to discontent.

So while the eurozone has managed to stay out of the headlines this year, this might not last for long. As our regular contributor James Ferguson noted in this week's issue of MoneyWeek magazine, now that the German election is over, the bad news can be broken to German voters. One way or another, they'll have to pay to keep the eurozone together. And the most politically palatable way to do this is through US and UK-style money printing.

Already, there are signs that the ECB is clearing the decks for action. A few days ago Draghi repeated his promise to intervene if necessary, by pumping large sums of money into banks. As Capital Economics notes, the recent fall in eurozone inflation will give the ECB more room to take action. Even German prices are rising by only 1.4% a year, well below the ECB's ceiling of 2%.

Since money printing will boost stock markets, now looks a good time to buy into those markets that have been slapped down by political fears in the region.

The most extreme example of this bargain basement approach is Greece, available through the Lxyor ETF FTSE Athex 20 (PARIS: GRE). Despite rising by nearly 27% in the last year, the market still trades at less than three times the ten-year average of earnings. For those more risk averse, the Italian market is also cheap, with a cyclically-adjusted price/earnings ratio (CAPE)of 7.3. The best way to buy into it is through the iShares FTSE MIB (LSE: IMIB).

Of course, a looser monetary policy will also boost the German property market, which is already going through a mini-boom. You can read more about how to profit from this in my piece from August.

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