In the first of a quarterly series of updates from the Italian political scene, the Centro Einaudi - a think tank dedicated to the legacy of former Prime Minister Luigi Einaudi - notes that as the economic situation returns from the brink, it becomes harder to convince the Italian public and politicians of the necessity for reform.
Starting in June 2011, Italy was caught in the turmoil of the sovereign debts crisis. The spread between German and Italian bonds soared, and the nation’s solvency was put into question. The centre-right government, led by Silvio Berlusconi, passed three bills in five months trying to cut public expenditure. None, however, appeased the financial markets. In the meantime, Mr. Berlusconi himself had lost credibility, due to judicial inquiries and leaking in the media charging him with a number of alleged offenses. By the end of October 2011, the situation had become untenable: the government appeared to have lost its majority in parliament and there was a mounting pressure to do something, so as to avoid a "Greek" catastrophe.
In November, when Mr. Berlusconi finally resigned, Mario Monti, a professor of economics and former EU commissioner, was appointed Prime Minister by the President of the Republic. Mr. Monti’s government, formed in one week, had no elected politicians and was supported - nominally, at least - by a broad majority composed of the main centre right party (Mr. Berlusconi's Popolo della Libertà), the centre left Partito Democratico (PD), and a centrist Catholic party (the small UDC, led by Mr. Casini). All other political parties - from the secessionist Lega Nord to the populist Italia dei Valori - chose the opposition.
The new government’s first decision was to enact a bill on pension reform, which was immediately passed by the Chambers. As a result, the Italian pension system, one of the biggest drains on public finance, was put under control, providing automatic adjustment not only to economic growth (and, by the same token, to fiscal revenues) but also to population ageing. However, with the pension reform came a swathe of new taxes on property and income, and a VAT rise.
In the weeks that followed, the tensions on the financial markets eased, while the opinion polls suggested that Mr. Monti enjoyed wide support. Buoyed by this, the Cabinet then started to implement the recommendations to the Italian government specified by the ECB in August 2011 and reinforced by the EU Commission President, Olli Rehn, in November 2011: these required not only the reform of the pension system but also a number of measures of privatisation and liberalisation, particularly of the labour market.
It was then that the honeymoon between the government and its multi-coloured majority ended: while the centre-right objected to measures directed at liberalizing professions (such as notaries, lawyers, chemists, taxi-drivers, etc.), the centre-left found it almost impossible to accept an easing of the hire-and-fire rules on the labour market, strongly opposed by the leftist CGIL union. The result was a much watered-down ‘liberalisation’ law and an impasse on the labour-reform bill.
In the meantime, Mr. Monti tried to soften the German stance on fiscal rigour and the introduction of Eurobonds: but these attempts, which for a few weeks at the turn of the year had looked almost successful, appeared at last to have failed. The tensions on the financial markets rose again, with the spread on the Italian public debt climbing up and the Italian stock exchange losing all the gains it had accumulated in the first weeks of the year.
The coming weeks are likely to be inconclusive: in May there will be local elections in Italy, involving more than one fourth of the electorate (11 million voters); the date (May 6 and 7) coincides with the French second ballot and with the Greek general elections. It’s easy to predict that the elections result will affect the degree and duration of support that the Popolo della Libertà, PD and UDC are willing and/or able to lend to the government. In any case, the reforms that Italy needs are still proving difficult to realize: entrenched privileges, group interests, barriers to entry into all sort of markets are deeply ingrained in the Italian economic system. The pension reform was accepted because the country looked on the brink of a financial abyss: paradoxically, the subsequent improvement has made reforms harder, not easier.
It is clear that the road to reform, if ever seriously undertaken, will be long and painful, insofar as it requires the opening to the market of professions, jobs, industries, education (and cutting bureaucracy and red tape); there’s no way that the job can be done in a few months by a handful of professors with no electoral mandate of their own. The general elections are due in less than 12 months, and maybe they will be anticipated. Even the elections, however, will not solve the problem, unless they give a clear majority for the necessary reforms; and it’s not clear that the financial markets can wait until then.
Agenda Liberale - Centro Einaudi Torino
Read the Centro Einaudi's 'Agenda Liberale' newsletter at their website (Italian).
For more on the legacy of Luigi Einaudi, read Professor Jeremy Jennings' CPS blog.