February 2, 2012
Italy, we’ve been told the past several months, is a fiscal basket case whose flirtation with defaulting on its debt could destroy not only the eurozone common currency union but quite possibly the larger European Union.
In fact, Italy, third-largest economy in the eurozone after Germany and France, is arguably the world’s hottest national turnaround prospect. Under its astute new prime minister, Mario Monti, Italy might well emerge stronger from the euro crisis than it has been in decades.
Yes, that sounds counter-intuitive. Italy’s onerous debt burden of $2.5 trillion (Cdn) equals about 120 per cent of the nation’s GDP, more than twice the ratio in Canada and the U.S. The nosebleed 7 per cent yields that skittish global investors demand in buying Italian government bonds is an unsustainable drain on the treasury.
There have been regional and national strikes in protest of Monti’s proposed austerity measures. Italy remains a nation of tax dodgers, with one of the lowest rates of tax compliance among industrial nations.
And a Mafiosa whose power has long rivaled or eclipsed that of government and other institutions has seized on the credit crisis to expand its predations as loan sharks, especially among small businesses that have hit the wall.
Yet since Monti, 68, replaced Silvio Berlusconi as prime minister last fall, the career economist, university administrator and long-time eurocrat has scarcely put a foot wrong in laying the groundwork for a healthy transformation of what has to be among the toughest nations to turn around.
Monti’s austerity program is not the blunt instrument that panicky financial markets and Monti’s European peers had urged on Berlusconi and mistakenly expected from his vastly more competent successor.
Monti’s cutbacks in social services and government payrolls have been modest, notably in comparison with Britain. Indeed, Monti has placed a “firewall” around most social assistance programs in order that the books not be balanced on the backs of the least advantaged.
But Monti also is overtly pro-business, a surprise for those many global investors and even everyday Italians who scarcely know this mandarin who spent a decade in far-off Brussels as a European commissioner and the EU’s chief anti-trust cop.
At EU headquarters in Brussels, Monti had the backbone to challenge the monopolistic practices of Microsoft Corp. and General Electric Co. in Europe and win his cases against them. But his capitalist credentials were never in doubt. Today he’s trying to spur growth with low-interest loans and other assistance to Italian business to relieve the credit squeeze in the private sector.
While it would be an exaggeration to say that Monti is alone in grasping that economic growth, and not austerity alone, is the key to reviving individual prosperity and restoring fiscal health, he has been the first and most emphatic among his European peers in making growth subordinate to cutbacks.
The Monti agenda that holds promise of fundamentally changing his country is the sweeping free-market liberalization he advocates to promote entrepreneurialism in a largely state-run economy.
That is not to be mistaken for Thatcherism, whose free-market reforms, privatization and liberalization of regulations came to some degree at the expense of the working class. Monti’s strategy is closer to the evolution of Canada in retaining social-welfare protections while freeing former government-owned of Air Canada and Canadian National Railways Co. of the bureaucratic sclerosis commonplace in state-owned enterprises.
To revive tourism and consumer spending, Monti has lifted restrictions on store opening hours. At the other end of the spectrum of difficulty, Monti’s government is cracking down on tax cheats, of the everyday and tycoon variety alike.
In a recent, celebrated enforcement action, tax authorities pounced on a ski resort where they found 42 drivers of Ferraris and other luxury vehicles who’d inexplicably declared annual income of less than $40,000.
Monti has been running a hard-hitting TV ad campaign depicting tax cheats as parasites. The message, like other components of Monti’s carefully designed initial budget, reinforces a message of shared sacrifice.
And just as then-finance minister Paul Martin was at pains to credit Canadians and not Ottawa with transforming a record mid-1990s deficit into 11 consecutive surpluses, Monti attributes progress to fellow citizens.
“This was a very mature attitude by Italians,” Monti said earlier this month of the country’s widespread acceptance of austerity measures in his first budget.
The newfound Italian embrace of austerity – notwithstanding the occasional work-stoppage protest in a strike-prone country – “does merit a recognition by Europe that it doesn’t have to fear any more that Italy is a possible source of contagion for Europe,” Monti says.
An early reward was reaped in a January 12 bond auction, in which Italy was able to sell 12-month bonds at an interest rate of just 2.7 per cent, down from nearly 6 per cent a month earlier.
In short order, Italy has gone from a major threat to European stability, its people incessantly mocked outside the country as layabouts, to an influential force in helping solve the eurozone crisis and preventing a recurrence.
A respected countryman of Monti’s, Mario Draghi, now heads the European Central Bank (ECB). Monti himself has won lavish praise from Merkel and U.S. President Barack Obama.
Monti’s not an obvious candidate to lead a populist revival. Self-deprecating about his charisma deficit, the Yale University graduate with a passion for ancient Egypt studies happily confesses that he does not have Berlusconi’s “real art for telling jokes.”
“I’m not very sociable,” Monti has said. “You can imagine all the dinner speeches I’ve had to give all these years around the world. Every time it’s a struggle.”
But under Berlusconi, the land of Dante and Caravaggio had become for many a joke. Non-Italian commentators now observe how Monti has put a quick end to that. The speeches will likely continue to be a struggle, though, given how intently Monti’s audiences will be listening.