We are nearing the end of Mario Monti’s first year in office as Italian Prime Minister. As the largest of the Southern European economies experiencing difficulties paying off large public debts, Italy’s fate is crucial for the future of the European Union as a single financial entity. Italy’s main problem was a lack of economic growth due to the suffocating protection for insiders (bureaucrats, professional services, particular sectors) that prevented more dynamism in many parts of the economy. There was thus much speculation as to whether Monti could reform Italy such that economic growth would re-start.

When Monti came into office in November 2011, he quickly pushed through a smallish austerity package that was mistaken by The Economist and many other Western Media as the heralding of real reform. Around December\January he and his cabinet announced that they were going to look at each sector in turn, reforming as they went along. They even announced that they would push through reforms if no agreement could be found with unions and others, for instance on the important issue of how easy it is to fire people.

What actually happened to these announced intentions in 2012? Well, …. not much. No serious reform of the labour laws yet. No opening up of the professional services. No serious reduction in the bloated civil service. Just, basically nothing of consequence.

It is not the case that Mario Monti and his team are not generating legislation, far from it. Yet, even the meager reforms it is now putting in front of the Italian parliament are being diluted. All it took were a few demonstrations by the unions and some behind-the-scenes political pressure from the parliamentary supporters of the status quo.

So Italy has not reformed, apart from the pension reforms that were announced in the very first budget and whose details have largely been made up afterwards. Other than that, there have been some attempts at tackling tax evasion, but it is not clear whether that has worked yet. For instance, the high-profile policy of raiding large boats and shaming owners with luxury yachts but no tax returns reportedly lead most of those yacht owners to seek other harbours outside of Italy. Good for Slovenia and Malta, but not very useful in the short-run for Italy. Still, a public display of commitment to tax collection has its long-term uses so I would see that as a case of short-term loss for potential longer-term gain. Indeed, there are some signs that tax morale is already improving with an “8 per cent increase in receipts from evaders in the first four months and a 25 per cent boost in voluntary declarations”.

So apart from those successes, what did Mario Monti do wrong in terms of the big reform agenda?

Well, as I said when he just came into office, he had only a few weeks time to politically push through reform before the vested interests would make it impossible to do so. Even if the detailed reforms would be made up later, it was imperative to bite the political bullet immediate. Yet, he was too slow. He should have moved with great stealth and energy, deliberately creating an atmosphere of panic in order to minimize opposition to his plans. In stead, he did the opposite, giving out positive noises about the Italian economy and moving slowly yet deliberately towards reforms. The Financial Times said time was running out for him in May 2012, but in reality the game was already over by the end of 2011. Essentially he was behaving as if he was still a European Commissioner who had solid political backing and was asked to come up with the right answer in his own time. He simply did not have the personality needed to be a reformer.

Whether or not there was another agenda, as I speculated in December 2011 (when it was already clear he was going to fail at reforms), is harder to say. He has, both in March 2012 and again in recent months started to blame Germany and France for Italy’s problem, which I take as a sign of resignation in his failure but also as the first gambit to prolong his political life after his stint as PM. To be fair to him, he is nowhere near as blatant in blaming other countries as some of the Italian press. The anti-German sentiment in Italy in general is thus rising, for instance via an article in the newspaper Il Giornale talking about how Germany is using debt to establish a Fourth Reich. Perhaps he will thus run for the presidency and has all along kept that option in mind and therefore not wanted to really confront the vested interests. Perhaps he just truly was a bit naive about Italian politics. Perhaps there just never was a chance and pension + tax reform was the best he could get. I doubt we will ever really know.

As to the financial crisis in Europe generally, the behaviour of Italy the next few years is now very predictable: the vested interests are now fully alerted and organised against reform, so the only question is that of austerity versus outside bail-outs. Italian politicians, including Mario Monti, call for some form of bail-out, including money printing by the ECB or the option of Eurobonds. The IMF, the ECB, and the European Commission will all call for real reforms but wont get it and hence will have to make the actual decision as to whether or not to let Italy default on its foreign loans or bail it out. So far, they have been bailing out everything in sight so odds-on Italy too will get something.

6 Responses to Where did it go wrong for Mario Monti?

  1. Mr T says:

    ” speculated in December 2012″

    It is only August.

    I think you have the year wrong throughout the article.

  2. Paul Frijters says:

    thanks for spotting the typo on the date (now corrected), though I could only see only one (Dec 2012 in stead of Dec 2011).

  3. Matt says:

    One difference between Italy and the other PIGS is that most of their debt is held domestically. That means there are a lot of vested interests who don’t want a default.
    Monti should take advantage of that.

  4. Paul frijters says:

    Matthew,
    Yep, definitely. For precisely that reason I speculated last December that he might in fact only be aiming to get internal balanced so that he could credibly threaten to stop paying off foreign loans but keep paying the domestic ones. Still, it’s a threat that could only be enacted in extreme circumstances and hence has limited value. It won’t help Italy grow.

  5. [...] seems to be making a serious go of the issue of tax compliance. I have in the past criticised Mario Monti for not reforming the labour market and the economy, and it is clear now to virtually everybody [...]

  6. [...] seems to be making a serious go of the issue of tax compliance. I have in the past criticised Mario Monti for not reforming the labour market and the economy, and it is clear now to virtually everybody [...]

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