Monti's 'last chance' to put Italy on right track
by Pietro Battistella
The final phase of Mario Monti's technocratic government in Italy could set the country's political agenda for years to come – with crucial decisions on reducing the public debt and whether to seek EU aid framing the debate
Italy's technocratic government is entering its final phase and in about eight months, elections will be held. Mario Monti, the sober economics professor and former European Commissioner – who last November took over from Silvio Berlusconi as prime minister amid financial turmoil – has a last chance to sweep the house clean and set an agenda for the country post-2013. While Monti has repeatedly stated that he will not be running in the elections, the main political parties seem a long way from possessing the vision and reliability to lead the country out of its deep economic crisis. The 'strana maggioranza' backing Monti in parliament – the centre-right People of Freedom party, the centre-left Democratic party, and parties from a centrist group – is losing the trust of the citizens and has failed so far to renew its ruling class.
'Agenda Monti' is an expression often used in Italy to indicate the government's path – a set of reforms, from public spending cuts to liberalisation, innovation in public administration and flexibility in the labour market. But it is also an attitude, a political language and a methodology for Italy to follow after the current prime minister leaves office next year. Many politicians from the main parties have stated that they would stick to this plan, but in reality few believe they will do so, as it is uncertain whether they will have the necessary political capital.
In early August, just before parliament went on holiday, Monti won a vote of confidence on reducing spending by an additional €4.5bn this year – on top of a three-year €26bn austerity package. The hope was that a market crisis could be averted would not ruin the sunny Italian summer. The measures include a 10 per cent reduction in the number of public officials, rising to 20 per cent for senior public servants, plus a €1.5bn cut in ministerial budgets in both 2013 and 2014 then €1.6bn in 2015. In addition there will be a long-awaited reduction in the number of provincial governments, which are to be halved in number. There will be cuts from regional and local government of €13bn over three years, as well as reductions in the national health fund amounting to €900m in 2012, €1.8bn in 2013 and €2bn in 2014.
The main purpose of the package is thought to be to allow the postponement of an increase in value added tax. Currently VAT is set at 10 and 21 per cent, and the increase to 12 and 23 per cent was planned to take place in October – but has now been postponed until July 2013. The austerity bill, however, will not be the final attempt to find a solution to Italy's troubled public finances. Recession is hitting hard, with year-on-year economic decline of 2.5 per cent in the second quarter making it harder for Italy to achieve a balanced budget by 2013, as planned, and consequently regain the full trust of markets. That is why Monti's spending cuts are not yet over. The long-debated public funding of political parties and trade unions seem likely to be the object of a new package to be presented in September. Further cuts to local governments of about €10bn are also to be taken into account, as well as savings from reduction of enterprises' tax breaks.
According to most media reports, Monti – backed by Spanish Prime Minister Mariano Rajoy and French President Francois Hollande – gained a victory over German Chancellor Angela Merkel at the last European Council summit on June 28 and 29. After late-night negotiations led by the Italian, Merkel appeared to agree to give countries easier access to the permanent eurozone bail-out fund, the European Stability Mechanism. But it is now clear that that night's victory must be reassessed. Eurozone countries will still need to sign some sort of Memorandum of Understanding – it is as yet unclear how much different it will be from that agreed by Greece – in order to get access to European Union aid. While Monti wanted this mechanism to be automatic, that is, not requiring any formal request by the country in question. But Merkel, who is herself not exempt from domestic political tensions, has made clear that this would be too much an incentive for troubled southern economies to ask for EU help instead of implementing reforms. At that summit, Merkel lost the battle but not the war.
Another Mario, the president of European Central Bank Mario Draghi, confirmed this in early August when he repeated that the ECB's bond-buying programme would be enacted only following a formal request by a country in need. Therefore, a debate has begun in Italy over the potential signing of a memorandum of understanding for receiving EU aid – entailing, essentially, a partial loss of national sovereignty. Less than a year ago a letter was leaked from the ECB that requested the Italian government, then led by Silvio Berlusconi, make sweeping changes to its labour laws and take tough action to cut the deficit. The letter caused an outcry in Italian politics and a memorandum could have a similar effect.
However, while many believe Italy should 'make it itself' – that is, withhold from asking for aid from the EU – senior representatives of the Monti government have given assurances that there is no "no fear of signing a memorandum of understanding". Antonio Catricalà, former antitrust chief and now undersecretary of cabinet, said doing so would just mean meeting commitments the government has already made. "It would be a merely declarative act, with no new obligations. We are not and do not intend to become EU subjects."
For the first time in Italian history, European issues will be central in the electoral campaign. Elections are to be held at the latest by spring 2013. It is with this perspective that one must judge the hesitation that parties are showing in endorsing a request for EU aid, which would mean signing a memorandum. The consequence of this 'making it ourselves' attitude that has arisen among Italian political parties are a series of different proposals that aim to tackle the number one economic problem Italy faces in this crisis: its public debt. Italy has a huge debt that has reached €1.96 trillion, or 123.4 per cent of gross domestic product, making it the largest debt in relation to GDP in Europe, second only to Greece.
Reducing this public debt has become the main issue in Italian politics. Many different proposals are being submitted to Monti's government and are likely to be discussed, selected and made concrete over the next months. Some measures have been already been taken in the last austerity package: for example, some state-owned financial institutions, such as Sace, Fintecna and Simest, will be sold to the state-controlled holding company Cassa Depositi e Prestiti, a financial manoeuvre which will try to reduce public debt by about €10bn.
Meanwhile Vittorio Grilli, the treasury minister, is working on a plan to reduce debt by 20 per cent in five years by selling public assets. Other experts are drafting more drastic proposals: some of them, like the one coming from the People of Freedom party, aim to reduce the debt immediately by 20 per cent – or €400bn – by creating a private fund to manage and value public assets. Others, like the plan from former Prime Minister Giuliano Amato, suggest reducing the debt by €178bn euros in five years by utilising different tools. The general shared objective is to get the debt under the psychological threshold of 100 per cent of GDP. After all, the fiscal compact ratified by Italy obliges it to bring its debt to a maximum level of 60 per cent on GDP in 20 years.
Pietro Battistella is an Italian journalist
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"Monti's 'last chance' to put Italy on right track." Well, technically, the Italian PM just cannot solve the ongoing predicaments as the plights are macro issues and micro ones.
Naveen Kalyani - Belgaum, India