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Monti Plays Italian Politics in Labor-Law Overhaul: Euro Credit

Monti Plays Italian Politics in Labor-Law Overhaul
Angela Merkel, Germany's chancellor, left, speaks with Mario Monti, Italy's prime minister, at Villa Madama in Rome. Photographer: Alessia Pierdomenico/Bloomberg

Italian Prime Minister Mario Monti, seeking to bridge European differences over how to end the region’s debt crisis, succeeded in passing a labor market overhaul at home that has divided his allies and sapped his support.

The legislation, designed to revive Italy’s economy by making it easier for distressed companies to fire workers, was passed by parliament in Rome today before tomorrow’s European Union summit in Brussels. Italy’s 10-year bond yield, at more than 6 percent, has jumped 30 basis points since June 9 when Spain became the fourth euro-region country to seek aid. The yield fell 2 basis points today to 6.2 percent.

“In the European scenario, Monti is doing very well,” said Tommaso Nannicini, a professor of political economy at Bocconi University in Milan. “On the domestic side he looks more and more incapable of keeping together his majority and gives the impression of a lack of political action.”

Monti was pressed into watering down the labor law as Italy’s recession deepened and public support for the government waned. Monti is facing the possibility of early elections, while abroad he is pushing euro-region allies for collective action to foster growth. The summit will be Monti’s second meeting in less than a week with German Chancellor Angela Merkel, Spanish Prime Minister Mariano Rajoy and French President Francois Hollande after hosting the three in Rome.

Mutualizing Debt

European leaders are debating how to reshape the 17-nation euro area, with Monti and Hollande advocating proposals to pool government borrowing and Merkel continuing to stress fiscal discipline. Monti has been trying to increase protection for countries like Italy that have moved to tame their budgets and is pushing to collectively sell euro bonds as a way to bring down borrowing costs in the most-indebted nations.

Merkel, who opposes the mutualization of debt, said yesterday there would be no so-called euro bonds in her lifetime. Monti may struggle to keep his allies in line if he can’t wrest concessions out of Merkel at the summit.

“Passage of these critical changes to labor legislation will offer him some much-needed respite ahead of tomorrow’s EU summit,” Michael Derks, chief strategist at FXPro Group Ltd. in London, said of Monti. “These new labor laws may not be the revolution that the Italian labor market requires, but are an important first step.”

Former Prime Minister Silvio Berlusconi, who met with Monti yesterday to discuss the summit, said the government showed a complete “lack of determination” going into the meeting. Berlusconi, head of the biggest party in Monti’s coalition, later warned his lawmakers that 75 percent of the party’s supporters opposed backing the government, newspaper la Repubblica reported.

Extending Summit

For his part, Monti said that he would be willing to extend the summit through the entire weekend if there was a chance of producing an agreement before markets open on July 2.

The Italian premier has pledged to secure approval of the labor market reform before the summit to show progress on the structural reforms he pledged to make Italy more competitive.

Market turmoil is raising borrowing costs in a country that needs to sell an average of 35 billion euros ($43.7 billion) of bonds and bills a month to finance Europe’s second-biggest debt load. Italy paid the most since December to sell zero-coupon securities yesterday and returned to the market today with the sale of 9 billion euros of 185-day treasury bills at 2.957 percent, the highest rate since December.

Fiscal Rigor

Monti, a former university president who succeeded Berlusconi as prime minister in November, has sought to appease investors by taming Italy’s budget deficit and making the economy more competitive. He collected the first installment of a 10.7 billion-euro property tax this month and is conducting a review to cut billions of euros from public spending.

The final version of the labor-market law falls short of Monti’s original plan because it gives some fired workers the chance to win their jobs back in court. That concession, which disappointed employers and Berlusconi’s People of Liberty party, was made after Italy’s biggest union called a general strike and Monti’s key political ally on the center-left, Pier Luigi Bersani, vowed to oppose the bill.

“It is a step in the right direction, but it is not long enough,” said Andrea Ichino, a professor of economics at the University of Bologna. “Either you do it all the way through or you risk getting stuck in a system where firms can fire but they’re scared to hire.”

Borrowing Costs

Monti, 69, whose government comprises Italy’s main parties on both the right and the left, has maintained cohesion thanks in part to his success in bringing borrowing costs down from the record levels of late last year. When Monti was appointed seven months ago, 10-year bond yields topped the 7 percent level that led Greece, Ireland and Portugal to seek bailouts.

The arrival of the former EU competition commissioner, followed by his 20 billion-euro austerity plan and measures such as the labor reform, helped knock more than 200 basis points off that yield by March 1.

Now with the country mired in its fourth recession since 2001 and bond yields moving higher, public discontent is rising. Monti’s political backers are paying the price as public support declines in opinion polls.

Plunging Support

Backing for the main parties in the government has plummeted to the lowest in about two decades as voters tune in to previously marginal politicians, like Beppe Grillo. The governing coalition, which scored more than 77 percent in polls at its inception, is down to about 49 percent. Grillo, who is now polling at about 20 percent, has said that Italy should considering pulling out of the euro and defaulting on its debt.

Officials within Berlusconi’s People of Liberty Party and the Democratic Party have raised the specter of early elections, rather than clinging to Monti until the next vote, which is due by May 2013.

Early elections could produce a fractured parliament with anti-euro forces in the ascendancy, said Mario Baldassarri, the head of the Senate Finance Committee and a member of the Third Way coalition that is backing Monti.

“It would be crazy to go to early elections,” he said in an interview. “From time to time, Italian politician have given signs of madness. I hope this time they give signs of being responsible.”

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