Italian Prime Minister Mario Monti, by combining budget cuts with deregulation, has won praise from French President Nicolas Sarkozy for “spectacular progress” in fighting the debt crisis while racing to stay ahead of domestic critics.
Monti meets with U.S. President Barack Obama today at the start of a two-day visit to New York and Washington to persuade investors that Italy can tame its $2.5 trillion debt. That’s bigger than that of Spain, Portugal, Greece and Ireland combined and about four times larger than Europe’s rescue fund. His success may be vital to reducing Italian borrowing costs and preventing the euro region from breaking up.
“There’s no European more important for Obama to meet right now to understand that European leaders are aware of the problems and are dealing with them,” Philippe Moreau-Defarges, a researcher at Paris-based French Institute of International Affairs. “There’s no European leader right now who understands better how the global economy works.”
Monti, 68, who as a European Union competition commissioner in the 1990s told companies such as Microsoft Corp. what to do, has challenged labor unions on Italy’s rigid firing laws. Since taking over from Silvio Berlusconi in November, he’s also pushed back against Chancellor Angela Merkel and Germany’s insistence on austerity measures as a panacea for the debt crisis.
“Under Prime Minister Monti’s leadership, Italy is now taking impressive steps to modernize its economy, reduce its deficit through a combination of revenue and spending measures, and put the country back on the path toward growth,” Obama said in an interview with Italian newspaper La Stampa, that ran ahead of their meeting today at 2:45 p.m. at the White House.
At home, Monti’s pushed through 20 billion euros ($26.5 billion) in budget cuts and tax increases while reducing regulations he blames for Italy’s stagnant economy, which expanded at an annual average of 0.4 percent in the decade through 2010 compared with 1.2 percent in the euro area. In Europe, where Berlusconi was once publicly snickered at by Merkel and Sarkozy, Monti has won their praise while working to shift the focus from austerity to growth with the region’s economy poised for a recession.
Part of Solution
Monti’s “spectacular progress” in his first 12 weeks in office should serve as an example for other indebted European nations, Sarkozy said on Feb. 6 in Paris after talks with Merkel. Following his White House meeting with Obama, Monti will convene with investors in New York tomorrow to convince them, as he says, that Italy “is no longer the source of euro-zone problems, but part of the solution.”
Aided by the European Central Bank’s unlimited three-year loans to euro-area banks, Italian borrowing costs have plunged since Berlusconi resigned amid a crisis of confidence, sex scandals and criminal trials. The yield on Italy’s 10-year benchmark bond fell 12 basis point to 5.46 percent, the lowess in four months. When Monti took office Nov. 16 it was 7.37 percent, past the 7 percent level that led Greece, Ireland and Portugal to seek bailouts.
“The panic has receded,” Ronald Spogli, U.S. ambassador to Italy from 2005 to 2009, said in a phone interview. “It’s been a very positive initial period, but it’s hard to tell if it’s happy circumstances with the arrival of the other Mario,” he said, referring to ECB President Mario Draghi, a Rome native.
To cut Italy’s debt, Monti knows the nation “desperately needs growth,” Spogli said. Monti first sounded the alarm about Europe’s obsession with austerity in comments published before a meeting with Merkel on Jan. 11, when the premier warned cutbacks may trigger anti-European protests in Italy without clear signs of economic progress.
Italy wants to pair Europe’s new “fiscal compact,” which seeks to ensure budget discipline, with a “growth pact,” Monti told the Wall Street Journal in an interview published on Feb. 8. Italy last month submitted a proposal to the EU to give the European Commission more powers to sanction member states that fail to fully open up their markets to competition, a move that will help spur growth, Monti said.
“Monti plays a crucial role in ensuring that the euro-zone approach is a cooperative effort rather than a tug of war,” Marco Annunziata, former chief economist at UniCredit SpA who now holds that job at General Electric Co., said in an e-mail.
Following passage of his austerity bill in December, which overhauled pensions and raised taxes on gasoline and primary residences, Monti’s Cabinet approved legislation on Jan. 20 to boost competition among so-called closed professions such as notaries and pharmacists. A week later, the Cabinet abolished or loosened regulations in a bid to cut red tape and make it easier to do business.
Monti’s government now faces what may be its toughest task, with Labor Minister Elsa Fornero engaged in talks with unions and executives on easing labor laws. Past efforts to loosen the labor code have led to political violence, including assassinations of economists working on the issue in 2002 and 1999.
Susanna Camusso, head of the CGIL, Italy’s largest union, on Feb. 7 ruled out any increase in job-market flexibility or changes in the labor code’s Article 18, which bans firing without just cause and forces employers to rehire and compensate workers deemed unjustly released. Fornero has pledged to press ahead with the overhaul even without union approval, setting up a possible future showdown.
Monti faces a fair share of critics at home, and time is not on his side. His unelected government of non-politicians is serving out the term of the current legislature, which ends in spring 2013. Monti could be toppled before then as he relies on the political parties in Parliament, which must still approve the competition and deregulation laws to make them permanent.
Northern League leader Umberto Bossi Berlusconi’s coalition partner in the previous government has pushed the former premier to aid in bringing down Monti. Berlusconi has so far pledged to support his successor.
Monti’s popularity gained last month even after he pushed through the austerity bill. Confidence in Monti climbed five percentage points to 57 percent from the previous monthly survey, Rome-based IPR Marketing said Feb. 1 in a poll for daily Repubblica. Berlusconi’s rating was 22 percent in the last IPR taken on his government in November.
“Monti is one of the things that’s making some of the real euro skeptics question themselves,” Jim O’Neill, chairman of Goldman Sachs Asset Management, said in a telephone interview. “He’s become perhaps the most thoughtful leader in Europe.”