Italian elections: Monti vs. Berlusconi and a test of democracy

The upcoming Italian elections Feb. 24-25 are testing whether democracy can correct itself. The elections are a contest between the populism of short-term fixes and the long-term reforms necessary to make Italy’s economy solvent, competitive, and sustainable over the long run.

Mario Monti’s period (beginning November 2011) as an unelected “technocratic” prime minister appointed by President Napolitano, outside of politics, was a “circuit breaker.” It aimed at shifting Italy’s unsustainable course by making reforms on a range of issues from pensions to taxes to flexibility in the labor market. Taking a sober look at the future, Mr. Monti’s policies sought to respond to a reality all of Europe must face.

Europe has 7 percent of the global population and accounts for 24 percent of global production and 50 percent of social spending. As the emerging economies from China to Brazil to Turkey level the playing field and erode Europe’s share of production, Europeans will have to become more competitive and productive to be able to finance the same level of social spending. Or the level of benefits people have become used to must be cut.

For all his willingness to face the facts, Mr. Monti has been rewarded by the electorate with plummeting poll numbers. Some polls suggest Monti's coalition would only garner about 13 percent of the vote in an election.

To be sure, austerity alone cannot enable Italy to escape its debt trap. But debtor countries like Italy have little fiscal room for stimulus. That has to come from the creditors in Europe, namely Germany. Yet, there too, Chancellor Angela Merkel risks political failure in German elections next fall if she would agree to a stimulus program or a “bailout” of the debtor countries. In Germany, too, the short-term horizon of voters blocks a long-term solution to Europe’s collective woes.

Monti’s “circuit breaker” policies are a battle against two forces: the “Diet Coke culture” of consumer democracy and the “vetocracy.” In a consumer democracy, all the feedback signals – the media, market, and politics – steer behavior toward immediate gratification. Just as people expect sweetness without calories, they seem to want consumption without savings, high standards of living without a competitive economy, and a welfare state without taxes.

Vetocracy is a decayed form of democracy in which special interests – from unions to banks – have staked a claim on the state and seek to block any reform that threatens their spoils. In Italy, such special interests even have so-called “acquired rights.” To satisfy such appetites, debt as a percent of GDP in Italy soared from 60 percent in 1980 to 120 percent by 1992.

A vote to retain this status quo is not only a vote for the past – because it is a vote for the vested interests of the present – but it is a vote against the future. Former Italian prime minister and current candidate Silvio Berlusconi is in many ways the poster boy for Diet Coke democracy and vetocracy as he revs up the right-wing populist impulse. Beppe Grillo on the populist left has more to offer by rightly expressing the anger and frustration over pervasive corruption. But anger and frustration are not a governing program.

Italians should consider what is at stake. Albeit in a global growth environment, former German chancellor, Gerhard Schroeder, was able to push through the kind of structural reforms Monti has proposed back in 2003 when he was in office. He was rewarded by being kicked out of office in the next election. Yet, a decade later, Germany is the strongest and most competitive economy in Europe as a result of those reforms.

Reforms take many years to manifest their benefits, and are always unpopular at the outset. Clearly, democracy mispriced the value of Mr. Schroeder’s reforms. Will it do the same for Monti’s?

Is Monti a legitimate candidate?

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