Mario Monti must move mountains to solve Italy debt crisis
Italy's designated premier, Mario Monti, must move quickly on economic reforms to calm financial markets. He and the Italian people have perhaps only days to signal their willingness to fundamentally change. At stake: their country, the euro, and the global economy.
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Beyond quick action, Italy must focus on boosting economic growth, which is an even greater challenge.Skip to next paragraph
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Italy’s low growth stems directly from its dismal business environment. The country ranks 87th out of 183 countries for ease of doing business, according to the World Bank. That’s four slots lower than last year. As an indicator of the political challenges embedded in this poor performance, Italy ranks 134th in taxpayers who actually pay their taxes, below Yemen and Sierra Leone, and well below Greece. To get electricity to a new business takes an average of 192 days and costs more than 327 percent above what the average Italian earns in a year.
The reform and austerity measures Italy has proposed are designed to address many of these issues, but they do not go far enough. Some parts of the planned austerity package can be quickly implemented, such as selling state-owned enterprises, tax increases on purchases and on wealthy individuals, and tax breaks to companies that hire young workers.
Most of the measures, however, will only yield benefits over the medium and long term, including education reform, rule changes to ease hiring and firing of employees, streamlining government services to reduce opportunities for corruption, and support for entrepreneurship.
Most critically, the reforms do nothing to address the country’s massive pension system, which absorbs 30 percent of the government’s total spending at a cost of 16 percent of GDP – the highest level in the world, according to research by Deutsche Bank.
These changes would be incredibly difficult in normal times. But after Berlusconi’s feckless and polarizing rule, public trust in government has been badly damaged. That may well make it tougher for the new government to forge a deal with its people – even if it is made up of “technocrats” instead of wily politicians.
Finally, Italy is dependent on its euro zone partners to calm the financial markets, and right now this looks unlikely.
The new European “rescue fund” is too small to bail out Italy. And the rules governing the euro prevent transfers from wealthy to struggling countries. Germany is on record saying it does not support changing this by expanding the European Central Bank’s efforts to buy Italian bonds, which most commentators see as the only viable option to support the country as it makes reforms.
Italy may survive the crisis if it acts decisively and with more unity than it ever has. If it fails, the euro may very well unravel, plunging Europe into recession, and taking much of the rest of the world with it.
The solution requires immediate and painful concessions by Italy’s people, and, in the long term, a fundamental change in mindset. Italian political commentator Beppe Severgnini wrote in Sunday’s Financial Times that “We Italians may be careless at times, but we are sensible when we want to be.” Let’s hope he is right.
Alexei Monsarrat is the director of the Global Business and Economics program at the Atlantic Council.