Italy is gambling that a sober-minded, church-going – and frankly dull – economist can perform the miracles required to save Italy from economic oblivion.
Mario Monti, a respected liberal economist and former European Commissioner, was given Europe’s most challenging job the day after the galloping debt crisis forced Mr. Monti’s polar opposite, Silvio Berlusconi, to resign as prime minister.
The two men could not be more different. Mr. Berlusconi used a combination of showmanship, humour and occasionally boorish wit to entertain Italians and win three elections. But his charm was not enough to defeat the debt crisis.
Enter Mr. Monti.
Italy’s President, Giorgio Napolitano, asked Mr. Monti, to form an emergency government on Sunday night. He knew that speed was of the essence. With Italian bond yields at the same levels that eventually triggered the bailouts of Greece, Ireland and Portugal, Mr. Napolitano wanted a new leader in place by the time the investment markets opened Monday morning.
Mr. Napolitano called Mr. Monti an “independent personality,” meaning his lack of political baggage gives him a good chance of uniting parliament’s fractious parties. Mr. Monti, dubbed “Super Mario” for his work in international finance and at the European Commission, where he was competition commissioner from 1990 to 2004, said Sunday night that Italy had to become “a point of strength, and not of weakness, in the [European]Union, of which we are founders.”
In a short speech in Rome Sunday night, Mr. Napolitano pleaded for unity and common purpose as Italy tries to regain the confidence of skittish sovereign bond buyers, economists and international leaders, some of whom doubt the country can reform itself quickly enough to prevent the debt crisis from shredding the 17-country euro zone.
“This is the moment of his test,” said Mr. Napolitano, referred to Mr. Monti and the formidable task he faces, adding that the new prime minister must “create a new government that can unify the political parties in a common effort to face the economic emergency.”
Mr. Monti, 68, must present the names of his cabinet ministers before he can be sworn in as prime minister. He rushed to find candidates on Sunday, though his effort will be made easier by the broad cross-party support promised to him, even if the various parties had wildly divergent views on how long his mandate should last before elections are called.
Mr. Berlusconi’s People of Liberty Party, still the single biggest force in parliament, has promised to support Mr. Monti’s efforts, but only for so long. Party secretary Angelino Alfano said it would support Mr. Monti’s government for as long as it takes to fulfill its economic-reform mandate. That suggests Mr. Berlusconi might already be plotting a comeback, even though he’s 75, hounded by court cases that allege corruption and sex with an underage prostitute and lacks the trust of other euro zone leaders.
Mr. Berlusconi resigned a few hours after parliament approved a package of economic reforms designed to stimulate Italy’s perennially sluggish economy and reduce its crushing €1.9-trillion debt load, Europe’s highest and the third largest in the world. Investor skepticism about Italy’s ability to repay its debt sent its sovereign bond yields to about 7.5 per cent last week.
But confidence in Italy, the euro zone’s third largest economy, will not be restored just because Mr. Berlusconi is out and Mr. Monti is in. In a note published late last week, the Wall Street investment firm Morgan Stanley noted that rising bond yields mean that Italy will spend nearly 10 per cent of its gross domestic product on debt interest payments alone. It said “Italy runs the risk of being ‘too big to save’” and thinks the euro will sink as currency investors assume the euro zone debt crisis, which began in Greece two years ago, persists.
Italy’s debt will come down if it can reduce spending drastically through austerity programs. But they can backfire if they are implemented during periods of weak or negative economic growth. In Greece, austerity program are pushing the economy deeper into recession.
The alternative is to stimulate growth, which makes the debt shrink in relative terms. But Italy has always been a growth laggard. The economists at the French bank Société Générale note that GDP per person in Italy is lower today than it was a decade ago, a rare instance of lengthy underachievement by a European country. The International Monetary Fund, which is monitoring Italy’s debt reduction and economic reform efforts, said that Italy’s economy shows “one of the worst performances among advanced economies.”
A test of Italy’s ability to raise money at less than crisis levels comes Monday, when it will try to sell five-year bonds. On Nov. 10, it had to pay a punishing 6 per cent to sell 1-year bonds, up from 3.57 per cent at its last auction, in October.