Bill Emmott - International Author & Adviser


Mario Monti is facing a big, hairy problem
The Times - June 25th 2012

Forget Greece. Put Spain to one side. The future of the euro will be decided in the country whose boot stretches stylishly between them in the middle of the Mediterranean. Yes, Italy. For that country is about to return to the centre-circle not just on the football field but in Europe’s, and thus the world’s, interminable economic crisis. The reason is a dangerous cocktail of debt, politics, a comedian and Silvio Berlusconi (and the latter two are not the same person).

            In many ways, this ought to be surprising. Last November, Italy (or rather the bond markets) finally forced the Bunga-Bungaing Mr Berlusconi to resign, and replaced him with the sober, scandal-free figure of Mario Monti, a distinguished economist and former European commissioner. It would be impossible to imagine a more perfect, more reassuring, defender of the euro and of the whole European project than Mr Monti.

            Moreover, as Mr Monti has recently been wont to say, Italy is, on the face of it, the most “virtuous” among the countries that are facing sovereign debt troubles. Thanks to budgetary measures he brought in immediately after becoming prime minister, Italy is one of the few euro-zone countries that is actually obeying the rules of the fiscal pact that was agreed last December.

            Its budget deficit this year is forecast by the International Monetary Fund to be just 2.4% of GDP, which is less than one-third as large as Britain’s (forecast at 8%). That also means that Italy has a budget surplus if you exclude interest payments on its debts, which is exactly the condition that Germany is demanding that Greece, Spain and the others achieve as soon as possible, so that they stabilise the level of their debts.

            So why should Italy be a problem at all? The answer begins with the huge public debts the country accumulated in the past: the world’s third-largest, at nearly 2 trillion euros, or 120% of GDP. It was mainly built up during the 1970s and 1980s, but no serious attempts to reduce it have been made since. This huge debt means that if the interest costs demanded by bond investors rise sharply, then Italy’s virtuous budget deficit will quickly rise, perhaps viciously.

            Most of all, though, the reason is the resistance, in politics, business, trade unions and other interest groups to any serious efforts at political or economic reform—the same sort of resistance that explains why the country’s debt was not cut during the 1990s, during its previous financial crisis.

            That resistance has made the life of Mr Monti, and his government of “technocrats”, many of them university professors with little experience of real politics, deeply frustrating. In his now seven months in office, the budgetary measures are Mr Monti’s only real achievement. He has brought austerity, but no hope of growth, in the absence of other reforms or any sizeable German-led reflation in northern Europe.

            His efforts to boost competition by liberalising markets, especially among the professions, have been largely stymied, chiefly by Mr Berlusconi’s right-wing party. His efforts to reform the country’s rigid, over-protective labour laws have faced fierce opposition from unions and the main left-wing political party, the Partito Democratico. By watering the reforms down to get them through Parliament—which might finally pass them this week—he has annoyed business too.

            All that is nothing unusual for Italy, where defensive, closed and selfish interests have long prevailed over the open, liberal, internationalist views epitomised by Mr Monti. This old story is now bringing, however, a newly hot political summer. The Monti government’s approval ratings have halved. With signs that the mainstream political parties, which are nominally supporting his government, are also suffering in the polls, everyone is trying to position themselves for the next general election—which is due in spring 2013, but could happen at any time before then.

            Enter the comedian. Beppe Grillo, a hairy radical and masterly public performer, has suddenly risen with his “Five Star Movement” to about 20% in the polls with a call for popular participation in politics, a plague on the established parties, and abandonment of the euro.

            The movement’s rise may prove unsustainable in national elections, but it has grabbed the political attention. So much so that none other than Silvio Berlusconi, who is never keen on anyone else hogging the limelight, has twice in recent weeks flown his own kite about leaving the euro and restoring the lira.

            Such talk is cheap, and Mr Berlusconi is always playing political games. But what this means is that neither the bond markets nor Chancellor Angela Merkel can expect any further economic reforms from Mr Monti, and they can have no idea what political leadership Italy will have in a few months’ time and what that leadership’s view will be of the euro.

            A political fog, amid a deepening recession, is the least reassuring picture possible in the euro-zone’s third largest economy, one that by all reckonings would be too big to be rescued, if it were to fail. At least with Spain it is easy to see where the problems lie, and then to grit German teeth to save that country’s banks. With Greece, the solution is tough love, and eventually expulsion. With Italy, the problem would be knowing where to start.

            In a way, this situation has arisen because Mr Monti is too responsible for his own good. Keenly aware of the risks of scaring the markets, he has been unwilling to challenge the political parties or stubborn senior bureaucrats by threatening to resign. While at first the financial crisis looked like it might strengthen him, actually it has weakened him, by limiting his room for manoeuvre.

            It is time for him to abandon that caution. Staying impotently in office will do nothing for Italy or for the euro. It would now be better for him to dare the parties to bring him down. If they do topple him, as they probably will, at least an early general election would do something to clear the political fog, tempting all sorts of other budding newcomers to rival Messrs Grillo and Berlusconi and determine Italy’s future—perhaps the young Blair-admiring mayor of Florence, Matteo Renzi, or an ex-banker in Mr Monti’s own government, Corrado Passera.

            The alternative is for Mr Monti to hang on, staggering tiredly through extra time, only then to lose on penalties. And we all know how ghastly that fate can be.


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