February 6, 2012 / 12:07 PM / 7 years ago

Analysis: Italy charm offensive more style than substance

ROME (Reuters) - The enthusiasm surrounding Mario Monti is excessive. He has not had time to address Italy’s problems seriously, never mind fix them.

Italy's Prime Minister Mario Monti addresses a news conference after an European Union summit in Brussels January 30, 2012. REUTERS/Eric Vidal

Yet he is feted by world leaders and the international press who treat him as the savior of Italy and probably the euro zone.

Monti, with his economists’ training and measured, articulate manner, is certainly impressive, and the contrast with his much lampooned predecessor Silvio Berlusconi puts him in a still brighter light.

Last week he even received a prize as European of the Year in the French parliament, yet Italy’s strengths and weaknesses are exactly the same as before he took office in November and its near term economic outlook has actually weakened sharply.

Monti has so far done very little to improve Italy’s medium term growth prospects, which is the only way the country can hope to sustainably lower its huge public debt, equal to around 120 percent of output.

Instead, he has tightened already extremely tight fiscal policy in a probably vain attempt to balance the budget in 2013 and - if his latest steps are approved by parliament - slightly opened up some very marginal corners of the service sector.

The charm offensive launched by Monti and his team to woo markets and opinion makers is highly reminiscent of a similar drive in the 1990s that helped Italy join the euro currency from its launch.

Then, as now, a group of market-oriented, English-speaking policymakers visited the London’s financial district and held briefings for the foreign media to explain reforms and assuage concerns.

For Monti, read former Prime Minister Romano Prodi or his economy minister, Carlo Azeglio Ciampi, and for current Treasury chief Vittorio Grilli, read Mario Draghi, now president of the European Central Bank.

Then, as now, the goal was to bring down prohibitively high borrowing costs and persuade Germany of the country’s merits, with current Chancellor Angela Merkel personified by the then notoriously rigid finance minister Theo Waigel.

Italy’s bond yields plummeted just as they are falling now, allowing it to join the currency club, but then, as now, the enthusiasm was premature and failed to appreciate that the country’s fundamental competitiveness problems were unresolved.


When Italy is in trouble it wheels out the technocrats, and because it has always produced hugely able, cosmopolitan figures such as Monti, Draghi and Ciampi, the world is duly impressed.

Yet Italy’s problems are ones of substance not of style, and they will take years to resolve whoever briefly takes the reins when the crises become most acute.

Italy’s chronically sluggish economy is weighed down by corruption, tax evasion, organized crime, a low birth rate, impoverished south, poor education levels, inadequate infrastructures and a huge public debt.

The list could go on, with each economist having his or her own view over which is most serious, from a dysfunctional justice system, to oppressive bureaucracy, to an inefficient labor market and dismally low employment rate.

This is the real Italy, or at least a huge part of it, and Monti would probably need two five-year terms to really change it. Instead, he will be around for a year at best, before the career politicians take over again.

In the meantime Italian benchmark bond yields have fallen from an unsustainable level of close to 8 percent in November, just before Monti took over, to well below 6 percent. But this may have more to do with the European Central Bank than Italy’s prime minister.

“The markets are more concerned with the actions of (ECB President) Draghi than those of Monti,” said Spiro Sovereign Strategy director Nicholas Spiro, in reference to cheap 3-year loans from the ECB giving banks handsome profits if they buy high yielding Italian bonds.

A Reuters quarterly survey of 20 economists last month showed Monti’s arrival has certainly not boosted expectations for Italy’s near term prospects for growth or public finances.

The 2012 GDP forecast plunged to -1.2 percent from zero in the previous poll, while the budget deficit was seen at 2.2 percent of GDP, virtually in line with 2.3 percent previously and well above the government’s goal of 1.6 percent.

None of the analysts surveyed expected Monti to reach his goal of a balanced budget in 2013.

Unprecedentedly, the new government did not even release new forecasts for the public debt at the end of last year to avoid disappointment at the Treasury’s latest internal estimates that show upward revisions for 2011 and 2012.


In December, Monti adopted austerity measures worth a net 21 billion euros, following 60 billion euros of belt tightening already passed last year by the much reviled Berlusconi.

His “Save Italy” package contained decisive pension reform - by far Monti’s most important step so far - but few other spending cuts, and was criticized for an overwhelming reliance on tax hikes which Monti admits will intensify the recession Italy expects this year.

To compensate, he promised a “Grow Italy” package of reforms, which amounted to abolishing minimum tariffs for professions, increasing the number of pharmacies and notaries and several other minor, micro-measures.

The reforms, which are still before parliament, were applauded by Italy’s partners, yet were watered down from early proposals and are certainly not the key to improving a growth rate that has averaged just 0.4 percent in the last ten years.

“Maybe liberalizing taxis and pharmacies won’t have a big impact on growth, but not doing it would give the impression Monti can’t even liberalize taxis and pharmacies,” said Alberto Mingardi, the director of the Istituto Bruno Leoni, a free-market thing-tank before Monti’s final reform plan was issued.

In the end Monti did not even liberalize pharmacies and taxis to any significant degree, watering down early plans to allow medicines to be sold more widely and increase the number of taxi licenses.

A top Italian policymaker who asked not to be named said the reforms were “cosmetic” and had skirted far more relevant areas of high service sector costs and inefficiency, such as banks and dominant positions in energy and other markets.

Treasury chief Vittorio Grilli admitted to foreign reporters recently that the measures would probably do nothing to help economic activity for at least three years.

He also inadvertently highlighted the fragility of Italy’s debt reduction plans when he lamented that years of prudent fiscal policy had cut public debt from 121 percent of GDP in 1995 to below 104 percent in 2007, only for it to bounce back to 120 percent due to financial crises and recession since 2008.

For high debt, chronically low growth Italy, it seems dangerous to assume that future prudent fiscal policy will not be undone by similar crises long before the debt falls anywhere near the EU’s reference level of 60 percent of GDP.

Reporting By Gavin Jones. Editing by Jeremy Gaunt.

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below