Bloomberg View: Does Mario Monti Have a Second Act?
When Mario Monti was appointed—not elected—prime minister of Italy in November, most Italians saw him as a welcome respite from the flamboyant, bankrupt leadership of Silvio Berlusconi. With the economy headed for collapse, technocratic leadership and a break from politics as usual were exactly what they wanted. So they thought.
Now, opinion polls put Monti’s approval rating at slightly above 30 percent, down from more than 70 percent at the start of his tenure. The country’s media are disenchanted. Monti has failed to produce the miracle that Italy was hoping for, offering only painful remedies for years of misgovernment. It turns out that politics matter, and technocrats aren’t much good at politics.
Monti, an academic and former top European Union civil servant, has lived up to his reputation for getting things done. “Super Mario,” as the press called him, quickly appointed a team of fellow policy professionals, announced long-overdue austerity measures including tax increases and cuts in pensions, and proposed significant reform of Italy’s arcane labor laws.
Despite some necessary compromises with unions, the measures have improved the country’s fiscal outlook. The primary budget surplus (excluding debt payments) is on track to exceed 4 percent of gross domestic product next year, according to the International Monetary Fund—enough, at reasonable interest rates, to stabilize the government’s debt burden.
Unfortunately, Monti has inherited an accumulated public debt large enough—at 120 percent of GDP—to overwhelm his efforts to close the gap between current revenue and outlays. With investors’ confidence rattled, the cost of rolling over the debt is becoming prohibitive. If the bond yield—hovering at about 6 percent, up from 4 percent two years ago—stays high enough for long enough, the country will be insolvent.
A little help from Europe could make a big difference. Italy’s banks aren’t as troubled as Spain’s, so the crisis could quickly recede if confidence in Italy’s ability to refinance its public debt is restored. Monti has been urging EU leaders to back a plan that would allow the European Stability Mechanism—the EU’s new bailout facility—to buy Spanish and Italian bonds. European support, though, won’t ease Monti’s political difficulties. He still needs to maintain fiscal discipline, eliminate barriers to business, and make it easier to hire and fire workers. The IMF estimates that further reform in product and labor markets would raise Italy’s medium-term GDP by 6 percent.
There’s only so much a technocratic leadership can achieve. In a democracy, a sustained effort at institutional and economic reform must be underwritten by voters. Politicians must put forward the case for painful measures and win a mandate to make them happen.